Managing Cash Flow Part 1

Cash Flow graphic-representation-of-supportand the management of it are the keys to running a successful business. Not understanding what the definition of cash flow will lead to many sleepless nights.

Cash flow is not the same thing as gross profit or net profit. However, many business owners often mistake cash flow for these two terms. There are several components which go into managing and understanding cash flow.

They are:

  • Cash on hand in the business operating account.
  • Accounts Receivable.
  • Accounts Payable, both trade and operating.
  • Purchase orders to be placed.
  • Purchase orders placed but yet to be received, awaiting for receipt and an accounts payable invoice.
  • Purchase orders placed and received, awaiting for an accounts payable invoice.

The first three items above are or should be available on individual reports, while the last three are or should be available through a purchasing system.

When I have either run a company or consulted with one, I have always had these reports with me. They are not voluminous reports and are easy to navigate and calculate the key numbers needed to put together a cash flow forecast.

There are a couple of other components needed, payroll and the associated withholding taxes and  benefits. Plus any items not entered through the Accounts Payable module should you have any of these items.

Once you have a system for managing the above items in place, it is fairly easy to manage and pull the information that you need to accomplish you goal of managing cash flow.

I used this process and system to manage several companies, a non-profit being one of those, where cash flow is non-existent or uncertain at best. This system enabled me to monitor and plan who needed to be paid and when we should expect money to come in to cover expenditures. Reading or simply looking at the above, may seem complicated, but I am a simple person and I have used this information successfully for years. It is simply getting in the habit of using it and then it will become second nature.

By using this process, it will enable you to prioritize who is getting paid and what amount you are paying them.

There should be a system and procedure in place for managing accounts receivable. Once an account moves to another aging column, your ability to collect this amount decreases. Additionally, considerable time will be involved, which is a hidden expense, in collecting overdue amounts. If customers are not paying in a timely basis, communicate on a regular basis with each of them and prepare a call sheet for each account to memorialize each conversation. If it is appropriate, set them up on a payment schedule to enable you to collect some money at regular intervals. Remember, constant communication is imperative.

In the next post, I will review accounts payable and the techniques involved in managing this component of cash flow.

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