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Cash Flow Management

The entrepreneurial spirit that compels people to start their own business does not necessarily translate into them being good business managers and this can lead to a stumbling block for many small business owners.

cashFlowOne of the most troubling aspects of running a small business can be learning how to manage cash flow. Understanding the basics of cash flow can help owners plan for large and small upcoming events in their business.

Cash is what you have at any given time to meet your daily expenses. The cash spent to buy inventory or business equipment is an asset on your balance sheet, but cannot be easily converted to pay monthly expenses. Profit on an income statement does not equate to cash in the bank if you have accounts receivables which require payment. You can’t spend profit. A profit on the income statement does not always indicate financial health unless the company also has a positive cash flow that correlates to those profits.

Many business owners use a cash flow statement to help them understand the movement of cash in their business. A cash flow statement will tell them the sources and uses of their cash.

A typical statement has three areas:

  1. Operating cash flow – is the cash generated from the day-to-day operations of the business. For example, the sale of products, the collection of accounts receivable and payments from vendors.
  2. Investing cash flow –  the cash that is used to purchase equipment.
  3. Financing cash flow – cash from outside normal business operations. For example, money from lenders or shareholders. A new loan or the repayment of a loan creates the cash inflow or outflow.

Good cash flow management requires the business owner to be forward thinking – when and how will cash be needed. How will I acquire the cash needed- thru better accounts receivable collection or from a bank in the form of a loan?

Acquiring the skills necessary to become adept at cash flow management could mean the difference between business success and business failure.

William Vaughan Company has the skill and expertise to help our clients with all aspects of their business management and cash flow is just a small part of overall good business management.

By: Chris Schultz. Accountant

Healthcare Practice Management: Making Use of Cash Flow Projections

When you manage your practice’s cash flow effectively, you help your practice grow and thrive during both strong and weak economic times. The key to managing cash flow is the cash flow projection — a forecast of your practice’s cash receipts and expenditures.

A cash flow forecast shows the anticipated flow of money entering and leaving your practice on a monthly (or weekly) basis. With the help of this information, you’ll be able to create strategies to handle your practice’s cash surpluses and deficits and to control your overhead.

Creating a Forecast

The first step in creating a forecast is to examine your accounting records and historical patterns. For each income and expense category, project monthly cash receipts and expenditures. When you combine your practice’s cash balance at the beginning of the month with the projected net cash flow for the month, you can see if you will have a projected cash surplus or deficit at the end of the month.

Let’s say, for example, your projection for October indicates that cash expenditures will exceed receipts by $9,000 and you have an $8,000 cash balance at the beginning of October. Your deficit for that month is $1,000. Update your forecast monthly, if not weekly, using actual financial data.

What To Do with a Projected Deficit

If your projection indicates future cash flow deficits, you’ll need an action plan to deal with them. For example, you might use a line of credit, obtain a short-term loan, take steps to speed up the collection of money owed to your practice, or reduce expenses.

A line of credit will help you even out fluctuations in cash flow. A good accounts receivable tracking system should identify overdue accounts so that you can quickly follow up with delinquent patients and insurers. Stay on top of delinquent accounts with frequent calls and letters.

Reducing your practice’s expenses is another effective strategy for handling projected deficits. Some expense-reducing ideas to consider: an energy audit, a comprehensive review of purchasing policies, a reassessment of your practice’s space requirements, and a review of your current compensation practices.

Maximizing a Surplus

A surplus allows you to pay down a line of credit or invest in short-term or liquid instruments. Your bank most likely offers a variety of cash management services, such as an automated investment sweep, that can help your practice make the most of its excess cash.

An Important Tool

Cash flow projections can identify periods when cash may be tight so that you’ll have time to secure additional credit or take other steps to address the problem.

Monitor Cash Flow For a Healthy Bottom Line

If you want your business to grow and remain competitive, a solid financial plan and a well-conceived strategy can mean the difference between boom and bust.

The obvious place to start is with a cash-flow analysis.

Review your company’s cash flow statements to understand the cycle of inflows and outflows that stem from accounts receivables, inventory, accounts payable and credit terms. This helps identify any problem areas that need improvement.

A cash flow statement also highlights important distinctions, such as the differences between cash and sales or inventory. A ledger full of credit sales may look good on your Statement of Income, but that won’t help if you can’t pay your employees until you collect on those accounts.

By the same token, a warehouse full of inventory may represent great potential, but the electric company wants to be paid in cash, not with a gross of glow-in-the-dark shoe horns. Once you have analyzed your company’s cash flow statement, you need to create a cash flow projection.

This is an important cash management tool that lets you see when expenditures are likely to be too high or when you can expect a cash surplus and may want to arrange some short-term investments. The cash flow projection also provides a good idea of how much capital investment your business may need.

Cash flow statements and projections help your business in other ways, too:

  • If you are going to approach a lender for financing or potential investors for a cash infusion, they are going to want to see a cash flow statement based on generally accepted accounting principles (GAAP), as well as a cash flow projection based on industry averages, solid business assumptions, and market trends.
    The cash flow statement demonstrates how you manage your available cash. If you have borrowed from the lender before, the loan officer is going to want to see what you did with that earlier cash. If you managed the money well, your cash flow statement will provide the evidence.
  • If your business hits seasonal low-cash cycles every year, cash flow statements and projections will highlight those periods.With that information you can shop around for low-interest short-term financing to help keep your company running smoothly through those anticipated lean times. If your company hasn’t projected those cash crunch cycles, your choices become limited. You may wind up letting your bills slide and damaging vendor relationships, or you may be scrambling to arrange emergency financing that is likely to carry a high interest rate.

Knowing when you are approaching the threshold of a traditionally high or low cash period also can help you determine the timing for launching a product or service or the need to trim or expand your company’s staff.

Meantime, your company’s cash flow projection will show you, as well as potential lenders and investors, what to expect six months or a year from now. Cash flow projections are the key to making smart and profitable business decisions.

But, you may be thinking: My company has a Statement of Income. Why does it need a cash flow statement?