Cash Flow Reality and Misconceptions

 Is your company experiencing financial anxiety? According to a U.S. Bank study, 82 percent of business failures are due to poor cash management. In the current economic environment cash management has become even more critical for the life of small companies. According to various research organizations, the companies that are successfully surviving have been exerting control over their cash flow and costs.

Financial experts consistently agree that financial projections and cash planning are the most important financial planning tools for a business. That said, cash planning is the least intuitive of the financial management tools, and therefore the most challenging. And yet, nobody is more qualified than a business owner to forecast the cash for his/her business. The notion that only a financial expert can produce cash flow projections is erroneous. Think about it, the typical accountant is focused on the balance sheet and profit & loss statement (historical information) because their primary responsibility to their clients is to produce the tax returns at the end of the year. The typical bookkeeper is focused on the basic accounting necessary to keep the accountant happy, and the books in order. Of course there are exceptions to the "typical", and these individuals should be applauded.

Correcting some common misconceptions about cash and cash flow planning:

"We are profitable."

Fantastic, but profits are an accounting concept and have no direct relationship to cash flow. Profits are on paper. Cash is what you spend, and payments you have actually received, i.e. it is what you have "in the bank".
"Our accounts receivable is strong."

Again fantastic, but receivables have no direct relationship to cash flow since it has no designated timeframe. Receivables (e.g. invoices) is not cash. It is the intent of your customers to pay at some future date. Receivables is not cash until it is in hand.
"We don't have the time to do a plan."

The busier your company is, the more your company needs to plan. Financial projections do not have to take hours or days.
"We're not big enough to need cash flow projections".

Not true. In reality, it is the smaller businesses who do not have deep pockets that need financial planning the most. These are the companies most at risk when accounts payable gets ahead of cash on hand, or when long-term growth/acquisitions expenses out strip short-term income.
"It is too complex for the average business person to produce."

Not true. It is a matter of making good and realistic estimates about what you are going to be selling and when, what it will cost and when, and what and when your expenses will be, i.e. money-in and when vs money-out and when. There are tools to help with this process.
"We do the financial projections in our heads."

Unless your company has just one customer, and only a handful of expenses and cost-of-goods categories, it is unrealistic to believe that a business person can juggle all the variables in his head.
"We do our cash flow projections once a year when we do our budget."

The thought process behind this statement defies logic. Do you only check your bank account once a year? Ideally, a cash flow projection should be done every time A/P is processed (e.g. checks cut), or at the very least once a month.
"We look at our income statements and balance sheet every month."

Neither the income statement nor the balance sheet is sufficient to plan and manage cash. These reports are historic, they are not future facing.

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