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  • Writer's pictureShane Glavin

The Critical Role of Cash Flow in the Health of Your Business

Stack of $100.00 bills rolled on a table.

Business owners often don’t pay enough attention to their cash flow until it runs short. If you have found yourself focused more on growth and, specifically, the growth of your cash, that may feel as if you have a handle on your cash flow.

There is a difference between a growing cash flow and taking steps to maximize the potential of your cash flow. There are a variety of factors that contribute to business success, and each of these also influences the generation of cash flow. It’s important to have a clear understanding of how decisions will impact cash flow; it’s so important that it may be the difference between failure and success.

A cash flow statement is a financial report that predicts how decisions are made after a business plan is prepared. It is a common mistake to only focus on income generation and not place enough emphasis on strategies around cash flow generation. The result is that timing for expenses and working capital can be misaligned, forcing you to adjust your business plan.  

Often, the problem is simply timing, causing a gap between when revenue is collected from clients and paying vendors. The company is faced with liquidity issues, a problem that can limit growth opportunities.

Why A Cash Flow Forecast?

Produced as a result of a business plan, a cash flow forecast helps you assess liquidity requirements as you go through the business cycle, making accommodations for peaks and valleys in that cycle. This provides crucial information to investors and lenders, as well as suppliers about the cash cycle of your business. For instance, if you plan to offer 30-day terms to your clients, it will make sense to secure 30-day terms with suppliers.

Your cash forecast is a detailed report that includes assumptions to determine how cash receipts and payments will be timed. Your cash forecast should be updated on a weekly basis and it typically forecasts the next three quarters.

Why Outsource?

There are a few reasons why preparing a forecast of future cash flow is challenging. Here are some of the most common:

  • Fragmented information: it can be challenging to pull data from multiple accounting systems and bank accounts.

  • Leadership or colleagues who do not have a commitment to cash flow management means it is not the priority it should be.

  • A lack of experience preparing financial reports means you may not know everything you need to to adequately predict cash flow.

  • If your company uses a cash basis accounting method, you may struggle to correctly capture the expected receipts and payments making cash forecasting particularly difficult.

There are also some key indicators that help you determine whether your cash flow forecasting is adequate. Ask yourself these questions:

  • Do you have a reliable process for developing a cash forecast?

  • Do you have cash reserves on hand that would cover an unexpected crisis or allow you to fund a growth opportunity?

  • Do you recognize that you may need to take steps to put your company in a better position for potential growth?

  • Is your finance or accounting team able to easily answer your cash flow questions?

If your answer is “no” to any of these questions, it’s worth exploring the possibility of securing help with cash flow forecasting. To learn more about this and other financial reporting services, contact us at The Power CFO.



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