More than a resolution for a business, controlling cash flow is a responsibility that’s essential

This is the time business owners search for a resolution that will help make 2015 one of the best years yet for their organizations. But instead, they should stop searching and look at their company’s cash flow.

Managing a business’s cash flow is critical, especially if an organization is interested in protecting its liquidity and future growth. Business owners know that various sources of cash are available to them, but do they have a plan in place to help manage it once it has been acquired?

Smart Business spoke with Dave Cain, CPA, principal at Rea & Associates, to find out how business owners can start the new year on the right foot.

Why is managing cash flow important?

Cash flow is the lifeline of a business — not to mention a powerful management and accountability tool — and a 13-week cash flow projection will provide the business and its stakeholders a detailed picture of how well the business is doing. In addition, it can empower the management team to become more accountable to the business’s success.

Internally, a regularly maintained cash flow projection will help a company develop timely and attainable goals. When the business owner and the management team have a better idea as to how much money is going out and coming in (and why), they can adopt plans to manage the cash flow in a more favorable way.

When the business is managing cash acquired from an external source, the projection becomes a way to provide stakeholders with the information they need to monitor their investment. For example, a bank may require the company to provide quarterly financial information to ensure that it complies with the terms of their investment.

What does a business owner need to include in the cash flow projection?

To generate a strong projection, business leaders must include data from a variety of sources. For example, analyze accounts receivable to determine ways to quickly turn them in to cash or to better manage sales and improve profitability. Current inventory levels can also be reviewed. Excess inventory is cash that has already been spent and is not being used effectively; therefore take the time to review and segregate inventory that is old or obsolete and consider whether it can still be used to generate cash.

Another area to review and organize is accounts payable, which will help the financial team manage when payments are made.

Finally, look at the non-core assets and determine how much money is being spent to offer them. Are they viable? Do they align with the current client base? If not, maybe they should be discontinued in favor of an offering or initiative that produces greater revenue for the organization.

What goes into properly maintaining a 13-month cash flow projection?

A proper cash flow projection is based on facts — not on what a business expects (or hopes) will happen. If this is the company’s first attempt to create a projection, the initial step should be to look at the company’s historical trends, current initiatives and any internal and external factors that may impact the financial security of the business. This includes past, present and future billing and payment patterns.

It is also important to make sure that the cash the business needs on a weekly schedule is based on fixed and recurring costs. If this is established, then variable costs and expected sales may be estimated.

After the historical data has been compiled and the cash flow projection has been put into action, the company should set aside a time each week to update the data with current figures and information. This step is important if the cash flow projection will be used as a management tool.

With regular maintenance, the cash flow projection will become an accurate representation of the organization’s financial wellness while providing a framework for generating short- and long-term success.

Insights Accounting is brought to you by Rea & Associates