Dyer Consulting Group
After this analysis has been completed and added or subtracted from the beginning cash
balances, the likelihood of shortfalls may be ascertained and you can prepare yourself to
handle any gap that exists.
Fill Your Cash Flow Gaps
If a gap is predicted early enough, you can take cash-flow management steps to ensure that
the gap is closed, or at least narrowed in order to protect your business for the future.
There are three basic ways for you to improve your cash flow position. They are:
• Accelerating your cash inflows
• Delaying your cash outflows
• Minimizing operating expenses
If there is a need for additional funds, either to meet short-term shortages or for longer-
term growth, there are several sources of new funds that can be considered. These include
an overdraft facility with a bank, establishing a short-term revolving borrowing facility, long-
term financing from a bank or other institutions, factoring, or an equity investment.
Cash Flow Surplus
If you are managing and improving your cash flow, this will hopefully result in a cash surplus
for your business. A cash surplus is the cash that exceeds the cash required for day-to-day
operations. Like so many other things you do for your business, deciding where to use your
cash surplus requires some planning and your better judgment. The most common uses are
paying down your debt, investing in capital projects, payments to stakeholders or placing
the cash surplus in short term investments so that you have cash for a "rainy day".
The effect of cash is real, immediate and, if mismanaged or not managed at all, very
unforgiving. By properly managing your cash flow, you will know where your cash is tied up
and you can spot potential bottlenecks and act to reduce their impact. Focusing on
understanding and managing your cash flow each month allows you to be in control of your
business. As a result it will be dramatically easier to make informed decisions about how to
grow your company.
Want a PDF Version of this article? Click here.
balances, the likelihood of shortfalls may be ascertained and you can prepare yourself to
handle any gap that exists.
Fill Your Cash Flow Gaps
If a gap is predicted early enough, you can take cash-flow management steps to ensure that
the gap is closed, or at least narrowed in order to protect your business for the future.
There are three basic ways for you to improve your cash flow position. They are:
• Accelerating your cash inflows
• Delaying your cash outflows
• Minimizing operating expenses
If there is a need for additional funds, either to meet short-term shortages or for longer-
term growth, there are several sources of new funds that can be considered. These include
an overdraft facility with a bank, establishing a short-term revolving borrowing facility, long-
term financing from a bank or other institutions, factoring, or an equity investment.
Cash Flow Surplus
If you are managing and improving your cash flow, this will hopefully result in a cash surplus
for your business. A cash surplus is the cash that exceeds the cash required for day-to-day
operations. Like so many other things you do for your business, deciding where to use your
cash surplus requires some planning and your better judgment. The most common uses are
paying down your debt, investing in capital projects, payments to stakeholders or placing
the cash surplus in short term investments so that you have cash for a "rainy day".
The effect of cash is real, immediate and, if mismanaged or not managed at all, very
unforgiving. By properly managing your cash flow, you will know where your cash is tied up
and you can spot potential bottlenecks and act to reduce their impact. Focusing on
understanding and managing your cash flow each month allows you to be in control of your
business. As a result it will be dramatically easier to make informed decisions about how to
grow your company.
Want a PDF Version of this article? Click here.
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Copyright Dyer
Consulting Group, LLC.
All rights reserved.
Hosted by Yahoo
Consulting Group, LLC.
All rights reserved.
Hosted by Yahoo
| Closing the Gap: Effective Cash Flow Management By: Aaron Dyer |
"Cash is king". Have you ever rolled your eyes when you've heard someone make this
statement? While we can all agree that it has become a business cliché, the root of its meaning
does have merit. While revenues, profit, and even market share are all indicators of success, if
there is no cash in the bank to meet monthly bills, pay employees or make your loan payments
then any business will ultimately fail. By taking the time to understand and analyze your cash
flow, you will be taking the necessary steps to ensure your business is growing and healthy.
statement? While we can all agree that it has become a business cliché, the root of its meaning
does have merit. While revenues, profit, and even market share are all indicators of success, if
there is no cash in the bank to meet monthly bills, pay employees or make your loan payments
then any business will ultimately fail. By taking the time to understand and analyze your cash
flow, you will be taking the necessary steps to ensure your business is growing and healthy.
Understanding Cash Flow
Most business owners believe their cash flow is
defined as profits. This is simply not true. It is
possible to project a healthy profit for the year and
yet face a significant and costly monetary squeeze at
various points during the year. This periodic
challenge could be so drastic that you may worry
whether your company can survive.
So, if your profits are not cash flow, then what
exactly is it? In its simplest form cash flow is the
movement of money in and out of your business.
Inflows are from the receipt of money from the sale
of your goods/services to customers, receipt of
money on customer accounts outstanding, proceeds
from a bank loan, interest received on investments,
or investment by shareholders in the company.
Most business owners believe their cash flow is
defined as profits. This is simply not true. It is
possible to project a healthy profit for the year and
yet face a significant and costly monetary squeeze at
various points during the year. This periodic
challenge could be so drastic that you may worry
whether your company can survive.
So, if your profits are not cash flow, then what
exactly is it? In its simplest form cash flow is the
movement of money in and out of your business.
Inflows are from the receipt of money from the sale
of your goods/services to customers, receipt of
money on customer accounts outstanding, proceeds
from a bank loan, interest received on investments,
or investment by shareholders in the company.
Outflows are most likely the purchasing of raw materials and other components needed for
the manufacturing of the final product, investment in inventory for re-sale, paying salaries,
wages and other operating expenses, purchasing fixed assets, paying principal and interest
on loans, or paying taxes.
One of the biggest issues in managing your cash flow is that outflows and inflows seldom
seem to occur together. More often than not, inflows seem to lag behind your outflows,
leaving your business short. This money shortage is your cash-flow gap. By properly managing
your cash flow you can effectively narrow if not completely close this gap. You accomplish
this through a careful examination of the various cash inflows and outflows that affect your
specific business.
Analyzing Cash Flow
To properly manage your business's cash flow, you must first analyze the components that
affect the timing of your inflows and outflows. A good analysis of these components will
point out problem areas that lead to cash flow gaps for your business. The main components
that you can manage are:
Accounts Payable - While it is good cash-flow management to delay payment until the invoice
due date, take care not to rely too heavily on your trade credit and stretch your goodwill
with suppliers. Paying bills late can indicate that you are not managing your cash flow the
way a successful business should. You should take into account your suppliers’ terms of trade
– to which you will already have agreed.
Inventory – Monitor when and why you need inventory. An excessive amount of inventory
hurts your cash flow by using up money that could be used for other outflows.
Accounts receivable – If credit is normally extended to your customers, the payment of
accounts receivable is likely to be the most important source of cash inflows. To properly
manage your cash flow, you must know the negative cash flow affects caused by the time it
takes your customers to pay on their accounts. A very important element of managing your
accounts receivable is your company's credit policy.
A credit policy is the guidelines that spell out how to decide which customers you extend
credit to, the exact payment terms, the limits set on outstanding balances and how to deal
with delinquent accounts. The correct credit policy is necessary to ensure that your cash
flow doesn't fall victim to a policy that is too strict or to one that is too generous. A credit
policy that is too strict will discourage potential customers and reduce sales, eventually
leading to a decrease in the amount of cash flowing into your business. On the flip side, if
your credit policy is too generous it will attract slow paying or even nonpaying customers and
lead to cash inflow issues.
the manufacturing of the final product, investment in inventory for re-sale, paying salaries,
wages and other operating expenses, purchasing fixed assets, paying principal and interest
on loans, or paying taxes.
One of the biggest issues in managing your cash flow is that outflows and inflows seldom
seem to occur together. More often than not, inflows seem to lag behind your outflows,
leaving your business short. This money shortage is your cash-flow gap. By properly managing
your cash flow you can effectively narrow if not completely close this gap. You accomplish
this through a careful examination of the various cash inflows and outflows that affect your
specific business.
Analyzing Cash Flow
To properly manage your business's cash flow, you must first analyze the components that
affect the timing of your inflows and outflows. A good analysis of these components will
point out problem areas that lead to cash flow gaps for your business. The main components
that you can manage are:
Accounts Payable - While it is good cash-flow management to delay payment until the invoice
due date, take care not to rely too heavily on your trade credit and stretch your goodwill
with suppliers. Paying bills late can indicate that you are not managing your cash flow the
way a successful business should. You should take into account your suppliers’ terms of trade
– to which you will already have agreed.
Inventory – Monitor when and why you need inventory. An excessive amount of inventory
hurts your cash flow by using up money that could be used for other outflows.
Accounts receivable – If credit is normally extended to your customers, the payment of
accounts receivable is likely to be the most important source of cash inflows. To properly
manage your cash flow, you must know the negative cash flow affects caused by the time it
takes your customers to pay on their accounts. A very important element of managing your
accounts receivable is your company's credit policy.
A credit policy is the guidelines that spell out how to decide which customers you extend
credit to, the exact payment terms, the limits set on outstanding balances and how to deal
with delinquent accounts. The correct credit policy is necessary to ensure that your cash
flow doesn't fall victim to a policy that is too strict or to one that is too generous. A credit
policy that is too strict will discourage potential customers and reduce sales, eventually
leading to a decrease in the amount of cash flowing into your business. On the flip side, if
your credit policy is too generous it will attract slow paying or even nonpaying customers and
lead to cash inflow issues.
Cash Flow Budget
You would be shocked and amazed at the number of
businesses that fail because the owner did not see a cash
flow problem in time to do something about it. The key is
to always be able to answer the question - what do I expect
my cash balance to be six months from now? The best way
to achieve this is to do a cash flow budget. The cash-flow
budget projects your business inflows and outflows over a
certain period of time. You can put together a cash flow
budget by estimating the amount and timing of the inflows
and outflows of your business.
• Opening cash balance
• plus Projected cash inflows
• less Projected cash outflows
• equals cash-flow bottom line (the closing cash balance)
You would be shocked and amazed at the number of
businesses that fail because the owner did not see a cash
flow problem in time to do something about it. The key is
to always be able to answer the question - what do I expect
my cash balance to be six months from now? The best way
to achieve this is to do a cash flow budget. The cash-flow
budget projects your business inflows and outflows over a
certain period of time. You can put together a cash flow
budget by estimating the amount and timing of the inflows
and outflows of your business.
• Opening cash balance
• plus Projected cash inflows
• less Projected cash outflows
• equals cash-flow bottom line (the closing cash balance)
