How To Manage Cashflow Effectively – Part II

Today we continue our discussion on how to manage cashflow effectively.

Having realized the importance of cashflow in a business, which in my opinion, is more important than profit.

We can have a very huge profit, however if it is not reflected in the cashflow of the business, then it is high time we take a closer look at the operation.

How do we prepare a good and accurate cashflow forecast?

To manage an effective cashflow, we need to ensure we are able to prepare a good and accurate cashflow forecast.

There are a few points we need to take care of in preparing the cashflow forecast.

  1. Identify the outflow and inflow of cash in the business.
  2. establish the right line of communication for flow of information.
  3. outlined the assumptions and factors used in preparing the forecast
  4. Prepare, discuss and monitor the prepared cashflow forecast.
  5. adjust and amend as the situations become clearer.

1. Identification of outflows and inflows of cash in the business.

We need to know what are the outflows and inflows of cash into the business.

For inflows, the obvious item is the revenue of the business, then in the course of business, we may secure some financing. both these two are the inflows of cash into the business.

Besides the above mentioned two, sometimes, shareholders may decide to increase the capital of the business, this will be another item as inflow.

As for outflow, we have to decide which are variable and which are fixed items.

For fixed item, it can be the rental paid for premises, and leasing of equipment which have fixed rental rate.

I like to categorize the outflow into operating, financial and capital in nature.

in terms of operating, we are talking about fixed overhead and variable overhead.

you can also classify into direct and indirect payment, just to make it clearer and easier to understand the natures of outflows.

Direct payments can be expenses such as utility expenses, salaries for the staffs.

2. Establish the right line of communication for flow of information.

In preparing the cashflow forecast, it is important that we have the right line of communication for flow of information.

If we want to have an accurate forecast on cashflow, it is important that the operation side know what information to furnish to finance staffs, so that they can use the right data to prepare the forecast.

Finance staff must also know who to look ask for information, the right data, same with other department like marketing and customer services.

3. outlined the assumptions and factors used in preparing the forecast

In preparing the forecast, we have to make sure we have the assumptions correctly spelt out, and the factors used.

Without showing the assumptions, readers and users will not know what are the basis and how the forecasts are prepared.

4. Prepare, discuss and monitor the prepared cashflow forecast.

a cashflow forecast prepared and just left it on the shelf will not serve any purpose.

the management staffs need to monitor and discuss the forecast every now and then, to see how much is the deviation of the actual from the forecast.

5. adjust and amend as and when the situation become clearer.

if the management of the business is able to monitor the forecast regularly.

they will be able to see the deviation of the actual from the forecast and if need be, make the necessary adjustment, so that the forecast is more reasonable and sensible.

We can also use the cashflow forecast as a tool to make business operation better and more efficient.

from the cashflow forecast and in the weekly review of the forecast, we can see whether we are not doing as good in our debt collections, if that is the case, then we can take the necessary action, may be to beef up the debt collections process, find out why the customers are not paying.

If we pay more than  as forecast, we have to find out the reason.

By doing so, we can improve our business process and operation efficiency.

Getting the real cash position to match the forecasted figures, require a high discipline from every one in the business, thus, the importance of timely review and analysis between the actual and forecast.

Most companies are not able to survive a short term cash flow shortage, if no forecast is available, business will not know where it goes wrong, not to mention to take the remedial actions.

Cash flow forecasting is tedious and arduous,  bear in mind, it is also a very important tool.

This critical process will let you know how much cash your business can generate, it can also enable you to know what you need to fund future expansion and working capital.

While your forecasts will never be 100% accurate, by preparing it frequently, you will develop an uncanny ability to make a more accurate forecast if you can devote the proper resources to cash flow forecasting sooner rather than later.

In my next article, I will talk more about how we can make use of this business tool more effectively.

If you want to learn more about cashflow, you may want to go HERE

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