Have you analyzed your company’s cash flow?


We’ve all heard the age-old expression: “Cash is king.” No other place is this more true than in business.

Cash is the key component that makes any business function because it’s needed to pay banks, vendors, suppliers and employees.

Having sufficient cash on hand may also help keep a company out of debt by removing a motive for taking out loans and by preventing unnecessary expenses such as late payment charges.

lots of money

In addition, when trying to determine how much a company is worth, one fundamental rule many investors use is to invest in stock that earns a lot of cash year in and year out.

After all, a company is only worth what it can deliver in the form of cash to investors in the long run. Cash is needed for a company to grow and pay out shareholder dividends – both of which appeal to investors.

Statement of cash flows

Unfortunately, many businesses overlook the importance of cash flow analyses (cash flow budget, cash flow statement, etc.) because they believe that all of the essential financial information can be taken from the balance sheet and income statement.

However, the Securities and Exchange Commission considers the information presented on a cash flow statement so important that it requires all publicly traded companies to have their cash flow statement, along with their balance sheet and income statement, audited each year.

A business owner may ask, “If there’s cash at the end of the day, why do I need to categorize the cash inflows and outflows?”

The statement of cash flows is important because it helps to properly assess the incoming and outgoing flow of cash.

It also gives insight into a company’s operating, investing and financing activities. By categorizing cash flow activity into these three categories, one can see if company operations are providing or using cash.

Operating activities must be the primary long-term cash source of a company. That is, operations must eventually pay for the company’s debts, dividends and growth. Otherwise, a business owner will have to continue making capital contributions or take out new loans to keep the company running.

For example, a $2 million net increase in cash may sound great initially, but it may not be a good thing if cash used by operations was $100 million and cash from loan proceeds was $102 million.

It should be noted that net increases in cash shouldn’t always be expected since new or growing companies may expect to see a decrease in cash flow.

Cash flow budget

By using cash flow budgets, management can ensure sufficient funds to keep operations running smoothly. A cash flow budget projects your sources and uses of cash for future periods. With this budget, you can detect future cash shortages in advance and take corrective actions ahead of time.

This may involve shifting the timing of certain transactions – such as vendor payments or purchase of inventory. It may also determine whether money needs to be borrowed, when it needs to be borrowed and how much should be borrowed.

Periods of excess cash may also be noted. This information can be used to direct excess cash into interest-bearing assets, where additional revenue can be generated, or to scheduled loan payments.

Steps to help improve cash flow

For a business to stay afloat, it must maintain an adequate level of cash. In addition to the everyday goal of increasing sales, the following tips can help improve your cash flow:

Keep an eye on your receivables

  • Check customer credit histories because late or no payments slow down your cash flow and require collection costs.
  • Let your customers know the repayment terms, and offer a cash discount for early payment or cash payments.
  • Review an accounts receivable aging report frequently and follow up on past due amounts. The longer receivables remain outstanding, the lower the chances are that they will be collected.

Extend your timetable for making cash payments

  • Pay bills on time, and take advantage of discounts offered.
  • Don’t pay bills earlier than they are due.

Improve inventory management

  • Avoid excess inventory, which creates storage costs and cash outflow.
  • Eliminate obsolete inventory by marking it down and selling it. Obsolete inventory creates storage costs, and the longer it goes unsold, the less likely that it will sell.