Business Cash Controls
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Cash flow definition
Cash flow is the term used to describe all the different elements of cash received by a business, and all payments made by a business. This includes the processes that generate those flows.Cash flow management
Understanding that business cash flow is not a passive thing, and needs managing, using information in the form of reports and bank statements, and taking appropriate action as a result of the information in those reports is key to successful cash management, and hence critical to business survival.Identifying Cash Inflows
Firstly you must identify all the possible ways for your business to receive cash. After a bit of brainstorming this is our list:Cash Sales, Collection of debts owed to us, Receipts from investments such as Interest or dividend payments, Capital raising activities, including any proceeds from small business loans, or Investor capital put into the business in the form of directors loans, or share capital, and lastly receipts from the sale of any assets such as property, vehicles or machinery.
Cash Outflows
As with our personal finances, there always seems to be more ways of paying out money than collecting it in. Goods bought for resale, raw materials to make our product with, salaries and wages to pay for the people who make, sell, or administer our business, operating expenses including utilities, travel and marketing. Buying the assets to use in the business. Taxes (Only 2 things certain in life - death and taxes). Loan repayments. And dividends paid to investors who’ve invested money in the business.
That’s a fairly extensive list, and it comes as no surprise that keeping track of the different cash flows, and just as importantly the timing of those flows needs several pieces of management information.
Management information requirements
As a business owner you’ll have a pretty good idea of the business cash flow in your business, maybe to the point where you don’t feel it’s necessary to put anything down on paper.Its easy with the distractions of day to day business to overlook, or simply forget essential cash related aspects, and it is important to recognize you need good cash flow analysis on a continual basis, as this is the key to saving money on interest and unnecessary expenses, and your grip of the situation will determine your long term business survival.
From your identified sources of cash inflow and outflow above, you now need a series of reports to measure, and react to the cash cycle of your business.
Essential business cash control information
Customer information.A list of customers, and our agreement to extend them credit, with the amount of the credit limit.
A list of customers and the amounts they owe us. Some idea of when we can expect to receive those amounts and an indicator of old or overdue monies owed. (Most small business book keeping software produces this kind of report as standard – but do check).
A history of payments made by each customer. So we know their pattern of payments, and can be sure to spot any worrying trends.
Supplier information.
A list of all suppliers with any credit terms and agreed credit limits.
A record of the payments we must make, and the timing of those payments. (This information we would expect to get out of the business accounting software)
You will also need a recent bank statement, and you can then use this information to make a weekly cash flow analysis, often also called a cash flow forecast, by taking the latest bank balance, and adding any due receipts, and due payments into the appropriate week.
This will give you an idea of where any shortfalls or surpluses are expected, and you can then take corrective action to remedy any problems.
Using this kind of cash forecast in advance of any given time period prevents you from suddenly being in a ‘surprise’ situation, and will help you retain effective control over the destiny of your business.
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More about Controlling Cash Flow:
Working Capital Management - Get to grip with the activities that affect cash flow
For further information about inventory holding and cash flow implications, see this Veterinary Cash Flow article.
Take the pressure off your cash outgoings and reduce your business costs.
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