The start of a new year is always a good time to create a cash flow projection and work toward improving cash flow management skills. Adam Stewart, a debt collection expert, describes it this way: “Cash flow is having the right amount of cash in the right places at the right time, every time.” Cash flow management begins with observing the natural flow of funds in your organization, household, or business with the desired goal of generating useful cash flow projections. Here’s how you can get on top of your cash flow in 2023.
Studying the Flow of Cash
The movement of cash is called cash flow because it’s analogous to the movement of water through rivers, lakes, and streams. Some organizations, such as nonprofits, may have a very slow cash flow. Large amounts flood in occasionally, but there remains a steady need throughout the year. Others have a small, steady input and outflow with occasional minor “flooding,” meaning an increased drain on resources. Finally, some businesses find themselves needing to manage large amounts, both incoming and outgoing, comparable to the rushing movements of a great river.
The Importance of Cash Flow
Just as with water, it’s important to identify and understand the timing of your cash flow before an effective management program can be designed for a particular system. Not every plan works for all situations. For example, a cash flow projection for an organization that brings in most of its cash at year-end, necessitating a situation where it is doled out slowly over long periods, will look drastically different from a small company with steady cash in and relatively stable cash flowing out.
A change in finances, such as reduced revenue for a prolonged period, can lead to hardship and stress, especially if an unexpected emergency arises. For example, without regular cash flow projections and management, a sudden need to hire new staff or replace equipment can prove fatal for any organization, even those with substantial income. Knowing the amount of cash expected to flow in and out of a business and the timing of its ebb and flow can help predict cash shortages and periods when interest may be earned on excess cash. It can also aid in planning to ensure basic bills can be paid in a timely way and enhance your ability to make purchases to grow your endeavors.
Making Cash Flow When and Where You Want It
Once the nature of an organization’s cash flow is understood, cash flow management practices may be instituted and modified to meet cash flow requirements and the projections that have been established. Some examples of tools used in cash flow management are:
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Borrowing funds before they’re even needed to get optimal lending rates
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Creating a schedule for when and how to repay loans
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Inventory management – some types of inventory may justify stockpiling at low prices, while others may need to be moved rapidly to boost cash flow
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Leasing versus purchasing equipment for possible savings in the short term
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Negotiating debt payments and collections from customers
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A variety of loan options, such as lines of credit and additional mortgages, among others
Creating a cash flow projection and management plan can make the difference between an organization struggling to survive and one that thrives under any conditions. Richard Branson once famously said, “Never take your eyes off the cash flow because it’s the lifeblood of business.” For assistance in creating a cash flow projection and management plan, contact Myrick CPA for an appointment with financial advisors and make the best of your cash flow in the new year.