Last Updated on April 3, 2023
Cash flow is the lifeblood of a business. Without it, your business can’t grow or even maintain its current operations. Planning cash flow can help ensure that your business has the cash it needs to reach its goals or stay on track to expand in the future.
Cash flow planning doesn’t have to be complicated. However, it does require you to have a good understanding of what cash flow is, how to analyze it and how to manage it.
What is Cash Flow?
Cash flow is the amount of cash moving in and out of a business at a given point in time. It is calculated by subtracting the cash at the beginning of a period from the balance at the end of the period, which could be a month or a quarter.
Cash flow can be positive or negative.
- Positive cash flow means that you have more cash at the end of the period than when it started.
- Negative cash flow means that you have less cash at the end of the period than when it started.
- There are three main types of cash flow:
- Operating: Day-to-day transactions
- Investing: Transactions for expansion purposes
- Financing: Transactions related to dividends paid to stockholders
A cash flow statement can help a business understand where its cash is coming from and going during the period.
Why It’s Important to Analyze a Cash Flow Statement and How to Do It
It’s crucial for businesses to analyze their cash flow statements for several reasons.
- It’s an accurate indicator of the business’s performance.
- It allows businesses to take better control of their finances. For example, operating costs may need to be adjusted to ensure the business remains profitable. In addition, new revenue streams may need to be built to increase cash inflows if debts are high.
- It can help businesses find opportunities for growth. Cash flow analysis can help companies identify areas where they can strengthen their market positions or withdraw from areas where cash flow is low.
Cash flow analysis is important, but how do you do it? The first step in personal cash flow planning is to use a cash flow planning tool.
The right cash flow planner can help you quickly create and analyze cash flow statements. Statements will be broken down into the three main categories discussed earlier: operating, investing, and financing.
Each of these sections will tell you how much cash is left (if any) for each of these activities, as well as the total amount of money left from all activities.
Importance Of Cash Flow Forecasting
Cash flow analysis can give you valuable insight into the health of your business right now based on past activities. But what about the future?
Cash flow forecasting can help you plan for the future and guide your business decisions. With financial planning and cash flow forecasting, you can determine whether:
- You should expand into a new market
- A new product or service will perform as you had hoped
- You need to rein in spending
- The business is in a position to take on more debt
- You will have the cash to carry out your expansion plans
Cash flow forecasting can help you plan for the future. It can also help reassure stakeholders that your company will remain profitable in the coming quarters or beyond.
Methods To Manage Your Cash Flow
Analysis and forecasting are important for measuring the health of your business now and in the future. But to keep your forecasts accurate, you must manage your cash flow adequately.
To manage your cash flow:
- Learn your cash flow cycle. What are your cash flow trends?
- Ask customers to pay on time. Be proactive about getting invoices and bills paid to ensure that you have cash flowing into your business in a timely manner.
- Do more inventory turns. Rather than making big inventory purchases that take longer to turn, try making more inventory turns to keep less of your cash tied up for long periods of time.
- Negotiate with customers and vendors. Talk to your vendors to see if you can pay for supplies weeks or even a month after receiving them. Maintain a good track record of payments, and vendors will be more likely to agree. Additionally, ask customers to pay sooner if they request 30- or 60-day terms.
Cash flow management will play an important role in the health and future of your business. Understanding how to handle it, analyze cash flow, and forecast it can help you make smarter decisions for your company over the long term.
