A Fresh Look at Cash Flow Analysis

cash flow analysis

Experienced advisors share their tips on business cash flow.

Cash flow–the movement of funds in and out of your business–is what keeps the engine of your company running. As an established business owner, you know that many factors–from unrealistic revenue forecasts to slow-paying clients–can affect cash flow. In fact, nearly one in three companies in a recent study cited “maintaining adequate cash flow” as their main challenge to profitability.1

Even if you are very comfortable with managing your business finances, your cash flow practices will likely benefit from the input of a CPA or other professional advisor and the resulting cash flow analysis. You might also want to review the following advice from experts and owners who were asked for their top tips for cash flow issues.

Reconsider receivables. “Give incentives for clients to pay in a lump sum versus installments. The cash up front is vital early on,” says David Nilssen, co-founder and CEO of Bellevue, Washington-based Guidant Financial, providers of small business financing. “Once the business can afford it, do the opposite. We moved from annual billings to monthly fees and it made a significant difference in our cash flow–and planning. But you have to get good at collecting, and automate if possible.”

Be hands-on with financial responsibilities. “At least one of a firm’s owners must routinely analyze costs,” says Thomas McClintock, COO of NSI Partners, an online marketing company in Colorado Springs, Colorado. “Report generation can be outsourced, but this can’t substitute for an owner spending time with accounting software and spreadsheets and making sure spending is consistent with expectations, potentials for fraud are investigated, and that opportunities to cut costs are explored vigilantly.”

“My rule is that the bookkeeper never signs checks,” says Ruth King, serial entrepreneur based in Norcross, Georgia, and author of the book “The Courage to Be Profitable.” “The bank statements are sent home. The owner looks at them and then brings them into the office to balance the checkbook.”

Look into the future: “Perhaps the most important rule to follow to have a steady cash flow is to develop a cash flow forecasting model,” says Debra Robinson, president of Centennial Revenue Management in Centennial, Colorado. “I do this for all my clients. I base it off a four-month trend of current financials and project eight months into the future.

“If there are ups and downs on a monthly basis with cash flow, this forecast will help to avoid a financial squall. It will also show what a likely outcome will be if they don’t change anything in their financial story. Finally, it provides a way to model a strategy before executing it to see the effect it will have on cash flow.”

Build up your savings. “The most obvious solution to avoid running short on cash is to keep enough money on hand to deal with shortfalls,” says Marc Prosser, co-founder of FitSmallBusiness.com, a site that provides product and service reviews. “This might slow down your company’s growth, but it’s worth it to protect your business. It’s unlikely, but not impossible, that most active businesses will have a zero-income month. Having a financial buffer will give you time to address your issues if your cash receipts fall behind your cash outflows.

“Another strategy is to open up a separate bank account for expenses you can anticipate, such as payroll and taxes,” Prosser says. “That way, you won’t get thrown off by a number on your bank account that includes money you don’t really have to spend.”

Pay by credit card. “Always, always, always pay for anything that would normally cost cash with a ‘trade terms’ credit card, which will give you at least 40 days of float, while allowing you to earn 1 to 2% cash back for paying in full,” says Clint White, president of WiT Media in New York City.

Find new sources of revenue, advises Rohit Arora, CEO of Biz2Credit.com. “Landscapers go into snow removal during the winter months,” he says. “Restaurants expand into catering. Accountants are increasingly offering other financial planning services, and some of them have gotten into the business of helping clients secure small business loans and other financing.”

A routine cash flow analysis will help you keep on top of your company’s finances. Similarly, you can do a cash flow analysis on your personal finances.

1Atradius Payment Practices Barometer, 2014

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