Solomon & Hoover CPAs, PLLC Blog

While growth and profitability are good measures of your business’s success, cash flow may better reflect its overall health. Cash flow is what allows you to meet current financial obligations — to employees, vendors and other creditors — and without it your company’s future is uncertain.

2 Analytical Tools

Two tools enable you to analyze your business’s cash flow:

1. Detailed budget. Maintaining a detailed budget for all expenditures can be tedious, but it’s essential to good cash flow management. Budget items should tie into and support overall business objectives. If you can’t demonstrate how an item supports a specific goal, question its inclusion. Such scrutiny helps you avoid unnecessary spending and makes more cash available for higher priorities.

Keep in mind that your budget is useful as an analytical tool only if it accurately reflects current spending. So update it regularly.

2. Cash flow statement. This statement is designed to report your business’s net increase or decrease in cash. It factors in the cash inflows and outflows of daily business operations, asset purchases and sale proceeds, and financing activities. Because it excludes noncash accounting items, it can help you pinpoint cash flow problems.

Cash flow statements are particularly useful when prepared monthly. This won’t be difficult if you have accounting software and use your budget as an initial input.

Cash opportunities

Once you know how your cash flows, look for opportunities to improve that flow. For many businesses, such opportunities lie in their accounts receivable department.

To minimize the risk of slow collections, conduct credit and reference checks on new customers and require them to provide deposits on orders or services to be rendered. Promptly send invoices to customers — by e-mail for faster delivery — and offer discounts for early payments. Also, don’t wait until accounts are 60 to 90 days late before contacting customers.

For more tips on improving cash flow, see the sidebar “Shortening the cash operating cycle.”

Balancing act

Cash-flow management can be a high-wire act. You can’t forgo growth. But as you grow your business, you’ll naturally have more operational costs, which will hamper cash flow. For help in striking the right balance, talk to your financial advisor.

Sidebar:  Shortening the cash operating cycle

For many businesses, the key to managing cash flow is to shorten the cash operating cycle. Consider doing the following:

• Increase prices.
• Lower inventory by writing off obsolete items.
• Stretch payments on accounts payable.
• Cut operating expenses.
• Minimize taxes through effective tax planning

© 2012 Michele M. Hoover, CPA. Alexander & Hoover, P.A., Certified Public Accountants, specializes in providing a wide range of diversified accounting, tax, finance, and consulting services to individuals and businesses.