Cash Flow Management Best Practices

Regardless of the type of business or business size, cash flow is going to be the life blood of the business.  So it stands to reason that cash flow management practices are going to also be important with respect to optimizing present and future business profits.

Its also safe to say that most businesses have room for improvement when it comes to managing cash flow as it tends to be looked at as a secondary activity to running the day to day business in many cases.

For a business that is highly profitable, cash flow improvements are focused on the money left on the table that could be used to increase profits.  For struggling businesses, better cash flow management can been the difference between survival and business financial failure.  And for the more middle of the road business scenario, having timely access to cash can have a profound impact on a company’s ability to take advantage of new opportunities when they are presented.

There are three basic elements to the cash flow management process.

First, there is the actual forecasting and tracking of all cash inflows and outflows that are expected or known to the business.

Second, there is having in place any debt or equity capital in place that is required to allow the business to operate in a solvent state.

Third, the profits generated by the business which result in an increase in cash require a strategy to optimize the return on this highly liquid asset.

Of the three elements, forecasting and tracking tends to be the one that requires the most attention and improvement.

Here are some best practices to consider for any going concern business.

  • When developing a forecast, the time period needs to be relevant to all the various payment requirements the business has.  Because expenditures can be staggered all through the month, forecasting should be done on a weekly basis, not a monthly basis.  In some extreme cases where there is a high volume of daily transactions, it may need to be projected out by day of the week.
  • The tighter the cash flow, the more it becomes necessary to  include everything in a cash flow forecast above what value you consider to be material.  For instance, materiality may be set at $500.
  • Cash flow should be projected out at least 6 months and then maintained at that point over time.  For greater accuracy, cash forecasting can be done over a longer period of time by month, say at least one year, and then broken down into weekly increments for the next two months to provider a longer term view of expected future events.
  • The ending weekly projected net cash flow balance can never be negative.  The whole point of the exercise is to develop a cash flow plan where inflows plus the opening balance cover outflows.
  • The tighter the cash flow, the more attention it will require.  Regardless of the stress on cash in a business, cash flow projections should be updated at least once a week.
  • Conservatism should be utilized to show outflows taking place when required, inflows being delayed, and a cash flow buffer or reserve in place for unplanned activities requiring cash or cash forecasting errors.
  • The master cash flow should be prepared and monitored by one person to maintain its integrity and accuracy.  This person must be involved in decisions related to cash so that all trade offs can be properly considered by the decision maker.

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