Cash Flow Management: The Ins and Outs

Cash Flow Management: The Ins and Outs

Cash Flow Management Systems

Every business needs a cash flow management system in place to monitor cash going in and out. Whether you’re in Los Angeles, Ventura, or Orange County, our Woodland Hills accounting firm can help you develop this kind of system. An advanced accounting system that separates cash from income into well-defined categories will help you determine how much cash you can use month to month to keep your firm liquid (or as close to liquid as possible). The most likely indicator of your future budget is your past budget–so we always start there. Based on your business history, we develop a projection of likely future receivables and expenses.  We can then determine whether our projections are holding true or failing to meet your expectations month to month, and you can adjust your cash flows accordingly.

If you are a new business, your budget will instead be based only on forecasts of your future projections. Since there is a bit more guess work involved, it is best to sit down with an expert in the early stages of your company so any needed cash flow adjustments can be made as soon as reality fails to meet expectations. Sometimes receivables can be tricky to project for new business owners so discussing your goals with a business manager to see if you are being realistic, is the best course of action.

Income vs. Cash

As you receive payments, don’t wait until you have a box of checks to deposit them all. Businesses tend to deposit big bulk drops on a given day of the week. While this is not uncommon, it is not the best way to make your cash work for you, especially for a new business. Money, when in check form, still isn’t “real” cash yet. You never know when a check will bounce, so you cannot count on those dollars to be ready when you need them. Also, resist the urge to simply deposit all of your cash in a business checking account.  If you only do that, you may as well have kept the payments in the shoe box; it’s gaining no interest. Whenever possible choose to transfer a portion of funds into an account that will grow for you—a short term CD, a Roth or some type of investment portfolio. Again, you’ll want to have a CPA or business manager that you trust to work with you on this. If you don’t know what you are doing, you may make errors in how much you can transfer thereby causing you hefty tax penalties later if you have to withdraw it early.

What is Cash Flow?

The most critical part of your business budget is the ‘real’ cash as opposed to the projected cash. You cannot run a company on business that is “lined-up” for the future; that’s merely projection. Remember just because the cash is promised doesn’t mean the deal is done. The deal is closed when the money is in the bank. While bookings or purchase orders might give you an indication of the money you stand to make, don’t make the novice mistake of thinking every order is money in the bank. Being realistic is the first rule of truly understanding your cash flow. However there is certainly value in knowing when the receivables are expected to come in, based on trends and projected sales. You can then link these numbers to your budget to forecast when you can reasonably expect payments. This is important because you will be better able to decide when you can reasonably afford to dole out salaries, pay bills or purchase items. Lastly, if after assessing all the real cash flow against the expected cash flow, the business is coming up in the ‘red’—and this is especially important for a new business—steps should be taken early to adjust. Real cash flow is vital to the success of any business.

Accounts Receivables Management

Many companies get so caught up in providing promised services, they forget to invoice at regular intervals—not the best practice. Deliver the goods or services with the invoice–plain and simple. The quicker you bill for completed work, the quicker you can expect to be paid. Your goal should be to regularly be adding to your balance sheet’s receivables column at a consistent pace. Have clients or customers who tend to pay late?  You may want to offer discounts or early bird incentives for paying by a certain date (and charge late penalties for paying late).

Again, it’s best to go over all of these items and more with a dedicated Certified Public Accountant who can guide you as both a business manager and financial adviser. As a Los Angeles area CPA, I have helped a number of companies and clients manage their cash flows to improve their liquidity and financial health. Please call us today at 818-593-6777 to discuss your needs and begin putting together a solid cash flow management plan.

photo by:

Philippe Put