Cash Flow Planning Can Ensure a Healthy Business

Tue, 21 Aug 2012

Is your cash flowing through your business like a well-oiled machine? No matter the size of your business, paying attention to your cash flow is a must. Business owners have so many priorities tugging at their time that it can be easy to focus on the crisis of the moment, rather than long-term cash flow planning. Business owners can also be so focused on tracking the next sale that they place less emphasis on tracking cash flow, the life blood of a business. Here are some ideas to get you thinking about your business cash flow:  


1. Prepare a detailed monthly projection of your cash flow for the next 12 months

It doesn’t have to be a fancy document, but should forecast the inflows and outflows of cash every month. If you need help, reach out to your CPA. You can also get free advice from a local chapter of Senior Corps of Retired Executives here: SCORE.This is a third party link. Please review the third party content guidelines by clicking here for more details. You can’t improve your cash flow unless you have a starting point. Measure it and see where the risks are. This is especially important if you’re growing quickly. When rapid growth happens, it’s easy to think that everything is going great…after all, your company is growing. However, this is one of the most dangerous times in a small business. Rapid growth can tie up your cash in higher levels of receivables, inventory, and other expenses, choking off the flow. A good cash flow forecast can uncover some of the potential risks in your cash flow cycle while you still have time to address them. Also it will also help you plan ahead for purchases you need to make or major seasonal expenses. The key is to address any potential monthly shortfalls before it becomes a crisis.  


2. Review and enforce your collections and payables processpay the man

It sounds easy: collect faster and delay payables without jeopardizing your vendor relationships. When customers delay paying you, they are using your cash, which means you need to find the cash you need elsewhere. That may mean having to borrow (which costs you money) or delaying your payables (which costs you your reputation and can also cost you money!). But even if you don’t have a lot of power to improve this area of your business, make sure you track trends in these metrics so you can respond to specific circumstances quickly.  


3. Ensure that your line of credit is being used appropriately each month

As we mentioned in our earlier blog, make sure you are not using your line of credit for long-term purposes, but only to offset short-term cash flow swings. If you are reviewing your cash flow forecast routinely, you should be able to know when your line of credit is going to be advanced, and, even more important, when it is going to be repaid.  


4. Select a banking partner who understands your cash flow cycle

Make sure that your banker understands your cash flow cycle so that he or she can make recommendations that are in sync with your needs. Do you have the right mix of short and long-term financing? This conversation with your banker is important not only in relation to your borrowing needs, but also with regard to how you use your deposit account to facilitate collections and disbursements. Your banker should be able to provide solutions that are efficient, cost effective, and can result in real cash flow benefits. Strong cash flow is essential for a successful business. A little bit of planning and focus can make a big difference in getting your business to stay strong and healthy.


Schedule a free consultation with one of our business bankers, or ask us any questions you have below.

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