How’s Your Cash Flow Doing This Week?

By Pat Brennan, Partner

How is your cash flow doing this week compared with what you expected two weeks ago?

If you don’t know, you’re driving in the dark without headlights.

It’s surprising to us how many times we work with business owners who know their budgeted versus actual profit and loss statements extremely well but only look at cash flow on an annual or quarterly basis. Many continue to operate under the false assumption that an annual budget is all they need to manage their business. Unfortunately, by the time revenue falls short and cash flow ebbs, it’s often too late to make adjustments. And negative cash flow quickly compounds. 

A remedy for cash insufficiency is a rolling quarterly forecast – a 13-week cash flow projection that allows more timely decisions when changing conditions impact revenue. It provides a detailed analysis tied directly into a tight sales forecast and the general ledger to track cash expenses and revenue. Timely variance analysis – examining the difference between projected and actual information – and proactive management are the keys to success.

Since cash is the ultimate performance indicator of good health, this approach reveals the losses before they materialize in your financial statements. Losses can be hiding in inventory that has disappeared, been miscounted or already been shipped, and in receivables counted as good that are really uncollectible.

Although lenders still want to see your annual budget, it is not an especially effective tool for actively managing a small, growing company operating in a dynamic environment. For example, there’s always a certain amount of guesswork in sales projections. But once you’ve committed to an expense structure to support those sales, the annual budget isn’t going to help you reduce those expenses if the sales force isn’t hitting its numbers... MORE

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