Is Your Business Experiencing Financial Anxiety? According to a US Bank study, 82 percent of business bankruptcies are due to poor cash management. In today’s economic environment, managing cash has become even more critical to small business life. According to various research organizations, successful surviving businesses have been exerting control over their cash flow and costs.
Financial experts consistently agree that financial projections and cash planning are the most important financial planning tools for a business. That said, cash planning is the least intuitive of the financial management tools, and therefore the most challenging. And yet, no one is more qualified than a business owner to forecast their business cash. The notion that only a financial expert can produce cash flow projections is wrong. Think about it, the typical accountant focuses on the balance sheet and profit and loss statement (historical information) because his main responsibility to his clients is to produce the tax returns at the end of the year. The typical accountant focuses on the basic accounting necessary to keep the accountant happy and keep the books in order. Of course there are exceptions to the “typical”, and these individuals are to be applauded.
Fix some common misconceptions about cash and cash flow planning:
“We are profitable.”
Great, but earnings are an accounting concept and not directly related to cash flow. The earnings are on paper. Cash is what you spend and the payments you have actually received, that is, it is what you have “in the bank.”
“Our accounts receivable are strong.”
Again, it’s great, but accounts receivable don’t have a direct relationship to cash flow, as it doesn’t have a designated term. Accounts receivable (for example, invoices) are not cash. Your clients’ intention is to pay at a future date. Accounts receivable are not cash until they are in hand.
“We don’t have time to make a plan.”
The busier your business is, the more you need to plan your business. Financial projections don’t have to take hours or days.
“We are not big enough to need cash flow projections.”
Is not true. In reality, it’s the smallest businesses that don’t have a lot of money that need financial planning the most. These are the companies most at risk when accounts payable are ahead of available cash, or when long-term growth / acquisition expenses wipe out short-term revenue.
“It is too complex for the average business person to produce.”
Is not true. It is a matter of making good and realistic estimates of what you are going to sell and when, how much it will cost and when, and what and when your expenses will be, that is, money inflows and when versus money outflows and when. There are tools to help with this process.
“We do the financial projections in our heads.”
Unless your business has a single customer, and only a handful of categories of expenses and costs of goods, it is unrealistic to believe that a business person can juggle all the variables in his head.
“We do our cash flow projections once a year when we budget.”
The thought process behind this statement defies logic. Do you only check your bank account once a year? Ideally, a cash flow projection should be done each time accounts receivable (for example, cut checks) are processed, or at least once a month.
“We review our income statements and our balance sheet every month.”
Neither the income statement nor the balance sheet is sufficient for planning and managing cash. These reports are historical, they are not future oriented.
“Our books are based on accruals, so we don’t need cash flow projections.”
Is not true. Accrual or cash-based accounting is about how your business handles sales and expenses, primarily for tax purposes. Your accounting method does not influence cash projections that deal with the future timing of cash inflows and outflows for your business.
“We are fine as we regularly produce a cash flow statement.”
Is not true. Don’t confuse a cash flow statement with a cash flow projection. The cash flow statement shows how cash has flowed in and out of your business in the past. The cash flow projection shows the cash situation over a period of time in the future.
“Our invoices are due upon receipt, so we do not need financial projections.”
Is not true. Take into account growth / acquisitions (eg, Extended business hours, new product or service lines, new staff, etc.) or changes in supplier payments (eg, Acceleration of payment schedule, increased costs, etc.) and expenses (eg, rate increases, additional services, etc.) could have a dramatic impact on your cash flow.
There are several ways to do a cash flow projection. If you talk to financial experts, each one may have their preferred method and terminology. However, you do not have to turn to a financial specialist to carry out your financial projects in a fairly simple way. ezTRUNNION LLC has developed a cash flow and cash management projection tool that is integrated with QuickBooks (R), the most popular small business accounting package. CASH Cop (TM) has enough flexibility built into the tool to allow companies to create cash flow projections that are tailored to their situation and needs. Because the tool focuses only on cash flow projections and cash management, the price is affordable for small businesses.
There are other products available that also make cash flow projections. Free Excel (R) templates are available from a variety of resources, including SCORE. These templates require the user to manually enter all the information and keep it updated manually. Due to the time required to acquire the necessary information and then enter it, users are generally discouraged from producing cash flow projections on a regular basis.
There are also financial planning tools, available for a price, that have a host of reports, charts, and tools built into one application. These types of tools fall into one of two categories: standalone or integrated. Standalone financial planning tools still require essential data collection and entry, but these tools are affordable for a small business and produce a variety of reports and charts. These tools vary in their “friendliness” to non-professional users. Check them out before you buy. Integrated financial planning tools can extract the necessary information from specific accounting systems (very few integrate with QuickBooks), but these tools tend to be more expensive and provide reports, charts, and other financial tools geared toward larger businesses. Make sure you understand the price (for example, monthly service charge or one-time purchase) before you buy.
In short, there is no substitute for cash projections. Any small business can take control of its financial future using this essential financial planning tool. There are a variety of products on the market that will allow a company to create its own financial projections without necessarily hiring a financial specialist. A business only needs to determine its cost constraints (product price) and time requirements (time required to learn and use the product) for a financial forecasting tool and then purchase the tool that suits its needs. A commitment to producing and periodically reviewing cash flow projections is essential to the financial success and survival of all businesses.