Cash flow is the life wire of any business.
Without a good positive cash flow, the business is not going to function at its optimal efficiency.
In the busy business environment, businessmen will not have the time to read long and winding cash flow statement with all the jargon.
To help businessmen to grasp some ideas of cash flow, this article may help to some extent.
The main objective is to let you understand how a cash flow forecast is prepared and how you can use it to monitor your business.
So assuming you need to get one cash flow statement ready.
What are the items you need to look for in preparing an effective cash flow?
The followings are 5 steps you need to have:
1. Know your cash flow inflow items.
2. The expenses your business are having.
3. Prepare the details of your outflow and inflow of cash.
4. Compile all the inflow and outflow listed in 3 above.
5. Conduct weekly review of the forecast with actual.
1. Know your cash flow inflow items
in preparing the cash flow, we need to know what are our inflow of cash.
The notable one is the sales the business is making.
it if is cash sales, then it is pretty straight forward.
things get more complicated if it is a credit sales, then we will have debt collection to deal with.
Debt recovery will determine to some extent whether a business has healthy cash flow or not.
The longer the trade debts are allowed to go on, the more acute will be the cash flow position of the business.
The other inflow item will be the financing expected.
A business may secure some financing from financial institutions.
It is important that when we prepare the cash flow forecast, we factor in this item.
2. The expenses the business are having.
I usually classify the expenses as direct and indirect expenses.
Direct expenses are salary, utility expenses and any other expenses where the business paid directly to secure the services.
any payment to suppliers are considered as indirect expense.
Then we also have to take into consideration of the nature of expenses such as operation, finance and administrative in nature.
3. Prepare the details of inflow and outflow of cash.
Now is the time to prepare our cash flow forecast, after we have listed the main criteria of the cash flow, we need to prepare the forecast by analyzing the past expenses and revenue.
4. Compile all the inflow and outflow.
once we have done step 3, then it is putting all the figures into a statement form.
the format will resemble an income statement showing the surplus or deficit depending on how much we have forecast for inflow and how much for the outflow.
5. Conduct the weekly review of the forecast against the actual.
If we prepare a weekly cash flow forecast, then we need to do an analytical review of the actual against the forecast.
The main objective is to see how is our actual cash flow vis a vis the forecast we have made earlier.
If we have prepared a cash flow with surplus, and if our actual inflow is more than that forecast, and our actual expenses are less than those forecast, then we are sure we will have surplus in cash flow.
however , if we have a low inflow as compared to the forecast and our actual expenses are higher than what we forecast, then we will have deficit in cash flow.
This warrant us to carry out an investigation on what go on which resulted in deficit in actual cash flow.
With that, we can review our business operation and take necessary remedy action.
To learn more about it, you can click HERE to get a copy of my lazypeopleguide for details.