Sailing the seas of business on a healthy cash flow

Money Matters

Pulling in revenue that will ultimately boost the bottom line is every business’s goal. However, keeping your company in prime shape to seize profitable opportunities and overcome financial challenges is related to another objective: having a healthy cash flow.

Every organization, if it’s around long enough, will experience strong economies and repressed ones. As captain of your proverbial ship, your job is to ensure your business sails the seas on a healthy cash flow in good times and bad.

Success comes in waves

The cash flow success of virtually any company depends on two cycles. From an operational point of view, the first is the sales cycle — that is, how long it takes your business to 1) design, develop and produce or provide a product or service; 2) market that product or service; and 3) eventually close a sale and collect the accounts receivable.

The importance of collections cannot be overstated. From clear, accurate invoicing to using bank lockboxes for faster access to money, collections certainly is a major aspect of cash flow management.

Many companies either underestimate the difficulty of the sales cycle or lose sight of its tendency to gradually expand in length. The former problem often affects start-ups: Entrepreneurs may believe they can get their wares to market, close deals and collect on them more quickly than reality allows.

The latter quandary, losing sight of the elongation of the sales cycle, can affect even well-established companies. Regular customers may start taking longer to pay. Or a major buyer might jump ship and be harder to replace than expected.

Along come disbursements

The second cycle is disbursements. This is the process of managing the regular, outgoing payments to employees, vendors, creditors (including short- and long-term financing) and other parties. As payments go out, your cash flow is affected.

The sales and disbursements cycles aren’t separate functions; they overlap. If they don’t do so evenly, your delayed cash flow can create a crisis. That’s why it’s critical for business owners to understand the interaction between the money being spent to generate revenue and the revenue actually being generated.

That is, just as you work to match revenue to expenses, you also should ensure that your sales cycle (cash inflows, including outside financing) at least matches your disbursements cycle (cash outflows). Ideally, you’re converting sales to cash more quickly than you’re paying expenditures — thereby strengthening cash flow.

Full-picture accounting

As your sales and disbursement cycles roll along, your company generates data. Failing to process this information completely and accurately could lead to cash flow confusion — or worse.

That’s why, if you’re not leveraging the power of today’s financial software, you’re leaving yourself vulnerable to the whims of fortune. At minimum, your accounting system should allow you to enter common transactions such as logging cash receipts onto deposit slips, cash disbursements onto checks and purchase and sales transactions onto orders and invoices. Consider, also, how you may be able to automate some of the processes, saving both time and money.

From there, review your use of ledgers. Every basic accounting system has a general ledger. But you may need a system with multiple subsidiary ledgers and special journals that simultaneously post when documents are saved.

Report generators are also critical for managing cash flow accurately. Your system should allow you to readily generate accounting reports — daily, weekly, monthly and annually. This means being able to easily record and access recurring transactions as well as accounts payable aging and payment scheduling.

Today’s accounting systems also can provide you with a “dashboard” of real-time information, so you’re less likely to be caught off guard by cash flow disrupters. In addition, budgeting tools can help you set and monitor budgets, perform “What if?” analyses, and compare actual results to goals.

A manageable voyage

Effective cash flow management is feasible with determination and adept planning. If you keep your eyes on the horizon and monitor the right metrics carefully, you should experience, if not smooth sailing, at least a manageable voyage toward profitability.

About Beth Moore 10 Articles
Beth W. Moore, CPA, is president of the certified public accounting firm of Beth Moore & Associates, CPAs. She can be reached at beth@bethmoorecpa.com or 757-224-1174. www.bethmoorecpa.com

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