Measuring cash flow
There are 3 distinct aspects that measure cash flow: core operations, investing, and financing. Every business must produce a cash flow statement; this is separate from the income statement and the balance sheet because it doesn't discuss future cash flow projections that are based on credit.
Your core business operations cause cash inflows and cash outflows. The operations refer to your accounts receivable and payable, inventory, and depreciation. Adjustments will be made in revenue or by transactions. The reason why many businesses experience cash flow problems is because the term "cash-flow" doesn't encompass just your monetary transactions. It deals with deprecation of products and the amount of money you have sitting in revenue. Businesses that do not properly manage their inventory often go through struggles because they fail to consider it in their calculations.
Cash flow is also measured by the amount you invest into equipment or assets. Even if you lease equipment, you are still investing money into new equipment and this is considered a "cash-out" item.
The last aspect of your cash flow statement will encompass any changes in debt or loans. Any dividend earnings must be accounted for along with any capital that is raised. Dividends that are paid out are also considered financing. Normally financing is for larger companies that bond to the public to receive the necessary cash for growth. When they pay dividends to the bondholders, the cash flow is impacted.
Preparing Cash Flow
To avoid cash flow problems, companies should prepare cash flow projections for the current and future year. If predicting 12 months into the future is too far, only do the projections for each quarter. Keeping your cash flow projections accurate will help your company raise the necessary funds it needs before you start having cash flow problems. Many companies did not prepare for the recession and they had cash flow problems. The lenders did not have the funding available and they tightened their regulations on lending money so several businesses went under because they were unable to get the financing they needed to run their business.
Cash flow is the lifeblood of an organization. It is vital to the growth of your business as well as the day-to-day operations. Managing your cash flow will give you an estimate as to what you can expect in the future. To predict your cash flow, you will need to look at the following information:
- Customer's payment history
- Paying your bills on-time
- Vendor re-payment rules
Just because the last 3 months of receivables have been 80-90 percent doesn't mean this trend will continue into the next month or two. This is why you need to look at the past year before you make your predictions. The upswing in receivables could be because of stimulus money or federal tax returns. Always be mindful of seasonal fluctuations when you are making cash flow projections.
Speak to various people at your company to obtain the necessary information you need. Salesmen, collections, credit workers, service representatives, and finance people will all be able to provide you with customer behavior and payment information. Determine how much cash comes in from the customer and how much you make on interest and other fees. If you use a factoring company to collect on bad debts, calculate this money in as well.
After you collect the data, create a calendar that outlines when bills are due along with your creditors terms. Having future knowledge of cash outlays will help you plan for them before they are due and this can help your company during times when cash is sparse. Make a list of all the equipment at your office, down to your office supplies so you know exactly when things must be repaired or ordered.