Cash Flow Reality and Misconceptions

Will be your company experiencing financial anxiety? Based on a U. S.
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Bank study, 82 percent of business disappointments are due to poor cash administration. In the current economic environment cash management is becoming even more critical for the life of small companies. According to various research organizations, the companies that are successfully surviving have been exerting control over their cash flow plus costs.

Financial experts consistently concur that financial projections and cash planning are the most important financial planning tools for a business. That said, cash planning is the least intuitive of the financial management tools, and therefore the most challenging. And yet, nobody is more competent than a business owner to forecast the money for his/her business. The notion that will only a financial expert can produce income projections is erroneous. Think about it, the typical accountant is focused on the balance linen and profit & loss declaration (historical information) because their principal responsibility to their clients is to create the tax returns at the end of the year. The typical bookkeeper is focused on the basic human resources necessary to keep the accountant happy, and the books in order. Of course there are conditions to the “typical”, and these individuals should be applauded.

Correcting some common misconceptions about cash and cash flow preparing:

“We are profitable. ”

Excellent, but profits are an accounting concept and have no direct relationship in order to cash flow. Profits are on paper. Money is what you spend, and payments you might have actually received, i. e. it is what you have “in the bank”.
“Our accounts receivable is strong. ”

Again fantastic, but receivables have no direct relationship to cash flow since it has no designated timeframe. Receivables (e. g. invoices) is not money. It is the intent of your customers to pay at some future date. Receivables is not cash until it is in hand.
“We don’t have the time to do a plan. inch

The busier your company is, the more your company needs to plan. Financial projections do not have to take hours or times.
“We’re not big enough to need cash flow projections”.

Not true. In reality, it is the smaller businesses who do not have serious pockets that need financial planning probably the most. These are the companies most at risk whenever accounts payable gets ahead of cash on hand, or when long-term growth/acquisitions expenses out strip short-term revenue.
“It is too complex for the average business person to produce. ”

Not true. It is a matter of making good and practical estimates about what you are going to be offering and when, what it will cost and when, and exactly what and when your expenses will be, i actually. e. money-in and when vs money-out and when. There are tools to help with this process.
“We do the financial projections in our heads. ”

Unless your business has just one customer, and only a number of expenses and cost-of-goods categories, it is unrealistic to believe that a business person may juggle all the variables in his mind.
“We do our cash flow projections once a year when we do our budget. ”

The thought process behind this statement defies logic. Do you just check your bank account once a year? Ideally, a cash flow projection should be done every time A/P is processed (e. g. investigations cut), or at the very least once a month.
“We look at our income statements plus balance sheet every month. ”

Neither the income statement nor the balance sheet is sufficient to plan and manage cash. These reports are historic, they are not future facing.
“Our books are accrual-based, so we have a tendency need cash flow projections. ”

Not true. Accrual-based or cash-based accounting is about how your company handles sales and expenses, primarily for tax reasons. Your accounting method has no keeping on cash projections which cope with the future timing of cash-in and cash-out for your company.
“We’re OK since we regularly produce an Income Statement. ”

Not true. Do not confuse a Cash Flow Statement with a Cash Flow Projection. The Cash Flow Statement displays how cash has flowed in and out of your business in the past. The Cash Circulation Projection shows the cash situation during time in the future.
“Our invoices are due upon receipt, so we have a tendency need financial projections. ”

Incorrect. Keep in mind, growth/acquisitions (e. g. growing business hours, new product lines or services, new staff, etc . ) or changes in vendor payments (e. g. acceleration of payment plan, increase in cost, etc . ) and expenses (e. g. rate increases, additional services, etc . ) could have a dramatic impact on your cash flow.
There are several ways to do a cash flow projection. If you talk to financial experts they each may have their preferred method plus terminology. However , you do not have to defer to a financial specialist to get your economic projects done in a rather painless way. ezTRUNNION LLC has developed an income projection and cash management tool that is integrated with QuickBooks(R), the most popular accounting package for small businesses. MONEY Cop(TM) has enough flexibility built into the tool to allow companies to make cash flow projections that suite their situation and needs. Because the tool focuses only on cash flow projections and cash management the price point is affordable for small businesses.

There are other products available that also do cash flow projections. Free Excel(R) layouts are available from a variety of resources, including SCORE. These templates require the user to manually enter all information, and personally keep them up to date. Because of the time required to acquire the necessary information and then key it in, users typically turn out to be discouraged about producing cash flow projections on a regular basis.

There are also financial planning tools, available for a price, that have a host of reports, graphs, and tools integrated into one particular application. These types of tools fall into 1 of 2 categories: stand-alone or integrated. The stand-alone financial planning tools nevertheless require the collection and keying-in of essential data, but these equipment are affordable to a small business, plus product a variety of reports and graphs. These tools vary in their “friendliness” in order to layman users. Check them away before buying. The integrated financial planning tools can pull necessary information from specified accounting systems (very few integrate with QuickBooks), require tools tend to be more expensive, providing reviews, graphs and other financial tools tailored for larger businesses. Be sure you understand the pricing (e. g. monthly service charge or one-time purchase) before buying.

In conclusion, there is no substitute for cash projections. Any kind of small business can take control of their economic future by utilizing this essential monetary planning tool. There are a variety of products on the market that will enable a business to make their own financial projections without always engaging a financial specialist. A business need only determine their cost constraints (price of the product) and time requirements (time required to learn and make use of the product) for a cfinancial projection tool, and then acquire the tool that suites their needs. Commitment to regularly producing and reviewing cash flow projections is essential to the financial success and survival of every business.

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