Cash flow, simply stated, is the movement of money in and out of your business. If you fail to satisfy a customer and lose that customer’s business, you can always work harder to please the next customer. But if you fail to have enough cash to pay your suppliers, creditors or your employees, you are out of business! No doubt about it, proper management of your cash flow is a very important step in making your business successful.
Understanding How Cash Flow Works
If you were able to do business in a perfect world, you’d probably like yo have a cash flow (a cash sale) occur every time you experience a cash outflow (pay an expense). But you know all to well that business takes place in the real world, and things just don’t happen like that.
Instead, cash outflows and inflows occur at different times and never actually occur together. More often than not, cash flows lag behind your cash outflows, leaving your business short of money. Think of this money shortage as your cash flow gap.
Analyzing your Cash Flow
To properly manage your business’s cash flow, you must first analyze the components that affect the timing of your cash inflows and cash outflows. A good analysis of these components will point out problem areas that lead to cash flow gaps for your business. Some of the more important components to examine are your amount and volume of accounts receivable and payable, the discounts you offer and your inventory.
Creating A Cash Flow Budget
A cash flow budget is a project of your business’s cash inflows and outflows on a month-to-month basis. Because of the uncertainty involved in the cash flow budget, trying to project too far into the future may prove to be less than worthwhile.
A six-month cash flow budget minimizes the amount of uncertainty involved in the budget. It also predicts future events early enough for you to take corrective action. However, if you’re applying for a loan, you may need to create a cash flow budget that extends for several years into the future, as part of the application process.
Preparing a cash flow budget involves four steps:
1. preparing a sales forecast, generally based on last year’s sales figures;
2. Projecting your anticipated cash inflows;
3. Projecting your anticipate cash outflows;
4. Putting the projections together to come up with your cash flow bottom line.
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If you have further inquires, please do not hesitate to contact Tannet at anytime, anywhere by simply visiting Tannet’s website english.tannet-group.com, or calling Hong Kong hotline at 852-27826888 or China hotline at 86-755-82143422, or emailing to tannet-solution@hotmail.com. You are also welcome to visit our office situated in 16/F, Taiyangdao Bldg 2020, Dongmen Rd South, Luohu, Shenzhen, China.
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