A business doesn’t have enough cash, if it doesn’t have enough at the right time. Poor cash flow can lead to missed opportunities for low inventory costs or discounts from vendors.
Remember, too, bankruptcies are caused by a lack of cash rather than a lack of profits – which is one of the major reasons why many successful companies go out of business.
For example, fast growth can stress your business with the added costs of new employees, inventory, and equipment.
And that’s why being aware of the factors that affect cash flow is important. In addition to those mentioned for fast growing companies, other factors may include:
- outflows for irregular items,
- seasonal sales that lead to fluctuations
- bi-weekly payrolls
- large purchase orders for volume discounts
- year-end sales commissions
- temporary closing of the business
While some decisions are easier to make, they become more difficult as these factors – and other surprises – start to add up.
However, there are a couple financial tools that can help you get a better handle on the situation.
Find Valuable Insights Into Your Cash Resources
What payments should you cut back? Where is your money going? Which products drain cash? Which ones create surpluses?
You’ll find the answer to these questions not in the Balance Sheet or Income Statement, but in the Statement Of Cash Flows. These statements can be used to evaluate past performance and show the reason for cash fluctuations.
Increase Your Net Cash Flow
In addition to the Statement Of Cash Flows, Cash Budgeting enables you to make the best decisions related to the growth of your business.
Budgeting is actually two things:
1) It’s a planning system for making objective decisions — rather than going by intuition or emotion
2) It’s a control system for keeping your finances in-line with your goals
So, if the budget indicates there will be idle cash, you can choose to invest. Or, if you’ll have a shortage, you can borrow or cut expenses.
And finally, another use of budgeting is to uncover patterns in your cash flow — helping you to maximize it.