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How to Navigate Tough Times: Cash Flow Management

How to Navigate Tough Times: Cash Flow Management

All businesses face unique difficulties - some are simply seasonal, while others are brought on by natural phenomena. Each company has a special set of tools at their disposal to manage each hardship, and their owners generally have a specific approach to finding a solution. There is one indispensable tool, however, that can be regularly used to keep any company running smoothly and help them learn how to navigate tough times: Cash Flow Management.

What is Cash Flow?

Whenever there’s an inquiry regarding a company's financial statements, the two most popular reports to look for are the Balance Sheet and the Income Statement. However, many people aren't as aware of a third report, the Cash Flow statement, which when analyzed properly can be extremely useful to owners and managers.

  • The Balance Sheet is a snapshot of one chosen day in the life of a business. It shows, in part, the cash on hand, assets that could be sold for cash, and debts that will eventually require cash.
  • An Income Statement looks at Revenues and Expenses over a selected period. Revenues include sales on credit, which may not be collected for some time (if ever), and Expenses, which include items that don’t directly affect cash balances, such as depreciation and amortization.
  • The Cash Flow Statement looks at the beginning (A) and ending (B) balances of cash on hand for a period and shows how you got from A to B. It pulls information from the other two reports and strips away the items that don't affect cash. 

When considering small business finances, the cash flow through a business is crucial because it is the lifeblood of any company. Credit with vendors and customers may be an important part of a business model, but in the end, the receivables need to be collected, bills and mortgages must be paid - and it all needs to be done with some form of cash! Just as the blood running through our body must move to keep us alive, cash needs to flow to sustain a vital business.

Forecasting Cash Flow

Inflation and a possible Recession are two terms that often enter business conversations on a regular basis; however, what may not be clear in these conversations is how they affect individual businesses. This year's high inflation means each dollar we spend now is worth less than it was a year ago. Couple that with the threat of a recession, where nearly every business has a reduced cash flow, and we may be set for a disaster. What can be done to avoid this double hazard? Forecasting company cash flow is an excellent tool that can help smooth over the bumps in the road that a business may encounter.

Cash Flow Forecasting is a means to estimate the amount of cash a business expects to collect, and the funds to be paid out over a selected period. This period can be a single month, a quarter, or an entire year. It is often helpful to look at a shorter period and a longer one to get a good sense of the ebb and flow of cash. As cash flow patterns are identified, opportunities to put that same cash to work in the organization's growth may be found. Cash flow forecasting can also aid in managing debt repayment timelines so exterior influences, such as inflation, will have a lessened effect.

If you have not yet used your Cash Flow Management tools or aren't sure how they work, the team of small business accountants at Myrick CPA can assist you in generating and using them. Contact Myrick CPA for an appointment to get started, so that you can fine-tune your company to its peak performance.