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The Importance of Cash Flow | Cash Flow Analysis | SVA CPA

The Importance of Cash Flow Resonates with Business Owners

The impact of COVID-19 on businesses has been substantial and it has upturned the notion of “business as usual.” Many business owners have found that forecasting cash flow has helped them anticipate potential shortfalls and plan accordingly to cover difficult periods.

Cash Flow Forecasting, Even in Unusual Times, Offers Your Business Several Advantages:

  • It enables you to avoid making rash decisions and protects your business over the long run.
  • You can make informed business decisions based on the timing of your cash flows and adjust your future working capital needs before you actually need the funds.
  • You can determine what credit terms to offer to customers, based on their payment history. As you identify and address late-paying customers, you can take action to obtain customer payments in a timely manner.

Some of the banking and financing benefits of cash flow forecasting include:

  • Saving money over time by avoiding late fees and bank charges from overdrafts.
  • Preserve your company’s good credit standing by reducing or eliminating late payments and overdue bills.
  • Obtaining or increasing a line of credit before your business actually needs the funds to support operations.
  • Paying down high-interest rate debt or investing excess cash to earn interest through vehicles such as liquid money market or sweep accounts.

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Getting Started with Cashflow Analysis

Performing cash flow forecasting is easier than you might expect. There are software and tools available such as QuickBooks or it can be as easy as using a simple spreadsheet to track and plan cash flow.

Steps to follow to perform cash flow forecasting are straightforward:

  • Start by determining the time period that best suits your business, such as weekly or monthly. This may depend on how often you bill customers, your payment terms and how often you pay your company’s invoices.
  • Begin with the cash balance held in the bank and add in anticipated cash receipts from customer payments, draws against your line of credit, cash credits, refunds and other inflows.
  • Subtract payments made for rent, credit cards, utilities, vendor payments and other cash outflows.
  • Your cash inflows should meet or exceed your cash payment requirements. If you foresee a shortfall, consider how you can address it by reducing expenses, pushing for faster customer payments or drawing on your line of credit.
  • Extend your forecast at least two to three months into the future to establish a rolling outlook for the quarter. We have found going out annually during times of cash concern is beneficial in giving you a plan and allowing you to adjust now to have a positive impact on the future. Updating your forecast and cash flow analysis monthly helps you stay current and avoid any unexpected surprises.

(Download Video Transcript)

Businesses need to access all the planning tools in their arsenal during the pandemic. Cash flow forecasting enables you to take a proactive stance and to better understand your future cash needs and potential spending gaps. Using cash flow forecasting will allow you to avoid surprises and make better business decisions.

Contact SVA for assistance on reviewing your cash flow projections.

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Biz Tip Topic Expert: Nicole Gralapp, CPA, CExP™

Nicole Gralapp, CPA, CExP™

Nicole is a Principal at SVA Certified Public Accountants working primarily with closely-held businesses and individual clients. Nicole performs a variety of tax, assurance and business consulting functions. She provides clients with technical expertise in areas such as tax planning, financial reporting, financial projections, budgeting, financial and estate planning and review of internal controls. Her experience in the hospitality, restaurant, construction and professional services industries gives her the ability to consult with clients in a variety of areas.

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