Is your company experiencing financial anxiety? According to a U. S. Bank study, 82 percent of business failures are due to poor cash management. In the current economic environment cash management is becoming even more critical for the life of small companies. According to various research institutions, the companies that are successfully surviving have been exerting control over their cash flow and costs.
Financial experts consistently concur that financial projections and cash planning are the most important financial preparing 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 only a financial expert can produce cash flow projections is erroneous. Think about it, the normal accountant is focused on the balance sheet and profit & loss declaration (historical information) because their primary 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, as well as the books in order. Of course there are exceptions to the “typical”, and these individuals should be applauded.
Correcting some common myths about cash and cash flow preparing:
“We are profitable. ”
Wonderful, but profits are an accounting idea and have no direct relationship to cash flow. Profits are on paper. Cash 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 solid. ”
Again fantastic, but receivables have no direct relationship to cash flow since it has no designated timeframe.
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Receivables (e. g. invoices) is not cash. It is the intent of your customers to pay at some future date. Receivables is just 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 require cash flow projections”.
Not true. In reality, it is the smaller businesses who do not have heavy pockets that need financial planning the most. These are the companies most at risk when accounts payable gets ahead of money on hand, or when long-term growth/acquisitions expenses out strip short-term income.
“It is too complex for the typical business person to produce. ”
Not true. This 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 what and when your expenses will be, i. e. money-in and when vs money-out and when. There are tools to help using this process.
“We do the financial projections in our heads. ”
Unless your business has just one customer, and only a small number of expenses and cost-of-goods categories, it really is unrealistic to believe that a business person can juggle all the variables in his head.
“We do our cash flow projections once a year when we do our budget. ”
The thought process behind this statement defies logic. Do you only check your bank account once a year? Ideally, the 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 total amount sheet is sufficient to plan and manage cash. These reports are usually historic, they are not future facing.
“Our books are accrual-based, so we don’t need cash flow projections. ”
Incorrect. Accrual-based or cash-based accounting is about how your company handles sales plus expenses, primarily for tax reasons. Your accounting method has no keeping on cash projections which cope with the future timing of cash-in plus cash-out for your company.
“We’re OK since we regularly produce an Income Statement. ”
Not true. Do not mistake a Cash Flow Statement with a Cash Flow Projection. The Cash Flow Statement shows how cash has flowed in and out of your business in the past. The Cash Movement Projection shows the cash situation over a period of time in the future.
“Our invoices are due upon receipt, so we may need financial projections. ”
Incorrect. Keep in mind, growth/acquisitions (e. g. growing business hours, new product lines or service, new staff, etc . ) or changes in vendor payments (e. g. acceleration of payment schedule, increase in cost, etc . ) and expenses (e. g. rate improves, additional services, etc . ) might have a dramatic impact on your cash flow.
There are several ways to do a cash flow projection. If you talk to financial experts both may have their preferred method and terminology. However , you do not have to defer to a financial specialist to get your monetary 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 famous 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 particular situation and needs. Because the tool focuses only on cash flow projections and cash management the price stage is affordable for small businesses.
There are other products available that also perform cash flow projections. Free Excel(R) templates are available from a variety of resources, including SCORE. These templates require you manually enter all information, and by hand keep them up to date. Because of the time needed 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 equipment, available for a price, that have a host of reports, graphs, and tools integrated into one application. These types of tools fall into one of two categories: stand-alone or integrated. The stand-alone financial planning tools still 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 charts. These tools vary in their “friendliness” to layman users. Check them away before buying. The integrated financial preparing tools can pull necessary info from specified accounting systems (very few integrate with QuickBooks), require tools tend to be more expensive, providing reviews, graphs and other financial tools geared to 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 small business can take control of their economic future by utilizing this essential financial planning tool. There are a variety of items on the market that will enable a business to generate their own financial projections without necessarily engaging a financial specialist. A business only need determine their cost constraints (price of the product) and time specifications (time required to learn and use the product) for a cfinancial projection tool, and then acquire the tool that rooms their needs. Commitment to frequently producing and reviewing cash flow projections is essential to the financial success plus survival of every business.