A cash flow forecast is an estimate of the amount of money you expect to flow in and out of your business and includes all your projected income and expenses. A forecast usually covers the next 12 months; however it can also cover a short-term period such as a week or month.
Your cash reserves continue to be low due to residual effects from the past year and the efforts to stabilize moving forward. Many customers are now accustomed to paying late (if at all), so you’ve had less cash coming in. How can you generate more positive cash flow and maintain it for the long term.
Much depends on your internal collection efforts. Do you focus on the accounts that are 30 to 60 days past due, or the ones 90 to 120 days (and more) past due? Age is the greatest deteriorating factor in the collectability of a debt. So if you’re putting your internal energy and dollars into pursuing accounts over 90 days, the 30-to-60-day slow-pays are becoming less collectable by the moment. And you’re in a vicious cycle.
The key is pro-activity:
The direct method of preparing the statement of cash flows is recommended by the Financial Accounting Standards Board (FASB). However, the direct method is rarely used.
Recent editions of Accounting Trends & Techniques published by the American Institute of Certified Public Accountants surveyed 500 annual reports and found that less than 10 used the direct method, while more than 490 used the indirect method.
To effectively delegate responsibility and authority in your organisation you must:
You will need to sell the inventory that you have and pay cash for all inventory and services that you need until you can build up your credit again. Managing your money with your cash flow chart will help so that you are aware of all expenses. Cutting expenses and increasing sales is always the goal.
With your financial projections, you can guess about how much you will be selling. Buy as little as possible to start—but make sure that you can get a quick delivery, as you never ever want to run out of anything. This is something that you will learn as you are in business.
Net incremental cash flows are the combination of the cash inflows and the cash outflows occurring in the same time period, and between two alternatives. For example, a company could use the net incremental cash flows to decide whether to invest in new, more efficient equipment or to retain its existing equipment.
Net incremental cash flows are necessary for calculating an investment’s:
To illustrate net incremental cash flows let’s assume that Your Corporation has the opportunity to purchase a product line from Divesting Company for a single cash payment of $800,0@Your Corporation expects that the product line will result in the following cash flows occurring in each year for 10 years:
These cash flows indicate that the net incremental cash flows are expected to be a positive $150,000 per year for 10 years, or that there will be net incremental cash inflows of $150,000 per year for 10 years.
Cash management refers to a broad area of finance involving the collection, handling, and usage of cash. It involves assessing market liquidity, cash flow, and investments.
At its simplest, cash flow management me delaying outlays of cash as long as possible while encouraging anyone who owes you money to pay it as rapidly as possible.
If a company issues stocks or bonds for cash and then pays off the debt, the traction is reported in the financing section of the statement of cash flows.If the traction is a direct conversion of debt to equity (shares of stock) or debt to bonds and no cash receipts or cash payments occur, the traction is to be disclosed as supplementary information.
Collection agencies take 30%, so try to collect on your own by calling and offering credit terms or returns or credit card payment. If the company does not have the money, you will not be getting paid so your only hope is to take back the merchandise if you can.
As you take steps to correct your slow-pay and dead accounts, you may continue to face challenges for your overworked staff members.
The goal is not to increase their workload, but to create efficiencies that ensure maximum value for their efforts:
The main difference between the direct method and the indirect method involves the cash flows from operating activities, the first section of the statement of cash flows. (There is no difference in the cash flows reported in the investing and financing activities sections.)Under the direct method, the cash flows from operating activities will include the amounts for lines such as cash from customers and cash paid to suppliers. In contrast, the indirect method will show net income followed by the adjustments needed to convert the total net income to the cash amount from operating activities.
The direct method must also provide a reconciliation of net income to the cash provided by operating activities. (This is done automatically under the indirect method.)
Nearly all corporations prepare the statement of cash flows using the indirect method.
A line of credit is the easiest way to have money available as needed. You would have a limit and use it as needed and pay only for what you use. If you are not able to get a line of credit, you need to make sure that your sales increase to create cash flow. Give your customers incentives to buy more or offer discounts.
Always have enough cash reserves to cover your slow months in business. You should be safe if you can have 3-6 months or more to cover all unknown or variable expenses that may come up. Always consider increasing your sales and moving your inventory as quickly as you can.
The key to effective cash flow management is early intervention. The earlier in the delinquency cycle you forward an account to a reputable third party, the higher the recovery results. And you’ll free up more of your staff members’ time to do what they do best — service your customers.
When choosing a third party, some key considerations include whether it:
A petty cash voucher is usually a small form that is used to document a disbursement (payment) from a petty cash fund. Petty cash vouchers are also referred to as petty cash receipts and can be purchased from office supply stores.
The petty cash voucher should provide space for the date, amount disbursed, name of person receiving the money, reason for the disbursement, general ledger account to be charged, and the initials of the person disbursing the money from the petty cash fund. Some petty cash vouchers are renumbered and sometimes a number is assigned for reference and control. Receipts or other documentation justifying the disbursement should be attached to the petty cash voucher.
When the petty cash fund is replenished, the completed petty cash vouchers provide the documentation for the replenishment check.
Along with managing inventory, better cash management is key to reducing working capital. As a result, being able to accurately forecast net cash flows and quickly model different scenarios, such as how fast to pursue growth initiatives without having to resort to external funding, is a top priority for CFOs.
The greatest people in business have certain attributes in common. Several personal qualities are important, like a thirst for continuous education, personal drive and motivation, strong goals and ambition, clear vision, and always a great deal of passion.
If you want to improve cash flow, think about implementing some of the following strategies:
Customers who developed slow/no pay buying habits in 2013/2014 have a choice for the months ahead: Do I pay my outstanding bill plus the cost of another tank of fuel, or do I go elsewhere and just pay for my new supply.
That load-to-load mentality leads to attrition. So does the strain placed on relationships with customers who were once in good standing but had difficulties during the 2013-2014 winter. At the same time, your competitor’s loss for these reasons could become your gain. And while new customers seem like a blessing, if they’re the result of attrition elsewhere, they could actually be a liability.
The best course of action is customer education and communication:
A mark-up can vary depending on your overhead costs. Higher overhead would require a higher mark-up. Always sell your merchandise for as much as the market will bear. If there is a higher perceived value, people will pay more. The discount from the vendor me more profit in your pocket.
A cash cow is often a profitable product or service that dominates a market and generates far more cash than is needed to maintain its market position. Companies may use the money from the cash cow to develop new products or to acquire other businesses. The term cash cow is also used to describe a division or segment of a company that consistently generates substantial amounts of excess cash.
The load-to-load mentality has developed over many years. Historically, propane marketers allowed non payment until customers needed their next tank of fuel. At one time, they could still realize a decent profit within this loose payment structure — but not in today’s economy.
There is no payment flexibility when it comes to customers’ electric, phone, cable, and other utility bills. So they’ve learned to prioritize and pay those on time. The goal is to change the load-to-load mentality and help customers view their fuel bill as a utility bill.
You can’t force timely payment, but you can encourage a change in payment behavior:
Present value is the result of discounting future amounts to the present. For example, a cash amount of $10,000 received at the end of 5 years will have a present value of $6,210 if the future amount is discounted at 10% compounded annually.
Net present value is the present value of the cash inflows minus the present value of the cash outflows. For example, let’s assume that an investment of $5,000 today will result in one cash receipt of $10,000 at the end of 5 years. If the investor requires a 10% annual return compounded annually, the net present value of the investment is $1,2@This is the result of the present value of the cash inflow $6,210 (from above) minus the present value of the $5,000 cash outflow. (Since the $5,000 cash outflow occurred at the present time, its present value is $5,000.)
A cash flow statement or statement of cash flows should be presented with a U.S. corporation’s annual financial statements.
If a corporation’s stock is publicly traded, the statement of cash flows will be included in its annual report to the Securities and Exchange Commission.
Create a simple spreadsheet that lists all the income from sales each day, week, month and year and all the expenses that the company has to pay out. (SBA.gov has more information on this topic here: Breakeven Analysis.) There are templates online that you can use; for example, SCORE offers a free Breakeven Chart that you can use.
The Cash Flow Statement or Statement of Cash Flows is required as part of a full set of financial statements because of the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 95, Statement of Cash Flows.