One of the most important tasks of managing your business is making sure you have enough money to pay your vendors and employees. Cash flow analysis and projection are the vital tasks that will help you manage your cash outlays and cash inflows, making sure your business operations continue uninterrupted. Having a profitable business is great, but profit and cash are not the same. A profitable business without cash will become insolvent. Depending on your business size and industry, weekly or even daily cash flow analysis is a must.
Early Warning Signs
Regularly performing cash flow analysis and cash flow projections will allow you to identify cash issues early and give you ample time to take corrective measures before it impacts your business. This, by itself, is sufficient reason for you to conduct regular cash flow analysis and projections.
Not paying your suppliers can result in not receiving your material on time and therefore in significant losses, both financial and reputational. Not being able to make payroll will have more severe consequences. Through your cash flow analysis, you will be able to identify upcoming payments and ensure you have sufficient cash available to make your payments.
Identify a Shortfall
What do you do if you have a payment coming due, but you do not have sufficient cash? You’ll need to borrow funds today against future income to pay your bills due today; however, this shortfall can only be determined be having a reliable cash flow analysis and projections. Knowing the gap in advanced will allow you to make an arrangement with your bank or creditor before the payments are due, ensuring you have the cash to pay the bills. Asking for a loan or line of credit too late will be evidence of bad cash management and will likely result in rejection.
Late Paying Customers
Cash flow analysis will allow you to identify habitually late paying customers and manage payment terms accordingly. If your customers regularly pay you late, you will be forced to depend on credit to pay your suppliers and make payroll, which in turn costs you in interest, increasing your expenses and reducing profits.
Paying Too Soon
Paying too late must be avoided as much as possible; however, what about paying too early? Your suppliers will certainly welcome early invoice payments, but it isn’t in your best interest. Through you cash flow analysis you will be able to determine if you are paying your bills too soon and can change your payment strategy accordingly. If you have 60 days to pay your bills, why would you pay in 45 days?
Cash flow projections is a vital part of managing your business; a regular cash flow analysis will provide invaluable information that you can use to improve your cash management strategy and keep your business from becoming insolvent.