If you have ever heard the expression “cash is king,” it’s because it is, for now at least. Bitcoin and other cryptocurrencies have been taking off recently, but cash still rules the roost for now. As one of your business’s top resources, it’s essential that cash is well managed, which includes understanding the timing of your cash flows, the activities that impact cash flow, and what to consider in times of cash shortages or cash surpluses.

Understanding Cash Flows

There are many situations that impact the timing of cash flow–for instance, the credit terms that you have with your customers may impact the timing of when you collect your accounts receivables. Your business might be seasonal, and the majority of your sales occur during a few months of the year. Understanding when these cash inflows occur is the first step in evaluating your cash management strategy.

Another thing to consider is that the profit and loss statement, which displays your revenues and expenses, is not always the best indication of your liquidity, which adds to the health of your business. There are many cash-related activities that are not reflected on this statement. For instance, your principal payments on debt and purchases of fixed assets are not reflected on this statement, and for some, those payments could represent a large chunk of cash.

Managing Cash Flows

Cash flow issues are best addressed by going through a process to fully understand the transactions that impact cash. Since cash flow is not an annual number that you can simply divide by twelve to get a monthly budget, the most effective way to manage cash flow is to prepare a cash flow projection covering all twelve months. Most businesses choose to do this in Excel; however, multiple software providers can simplify the process for you.

When developing your cash projections, base your projections on realistic budget assumptions; it’s better to overbudget your cash needs rather than underbudget. First start with the costs are that are normally occurring within your business, like employee wages, rent, insurance, and regularly scheduled debt payments, to name a few. Then move on to things like equipment additions, and any other unusual payments that you can plan for during the next twelve months.

Evaluating Cash Positions

After developing your cash flow projection, you might notice areas where you are falling short or experiencing a surplus of cash. It’s normally a good idea to have a line of credit established in times of cash shortages, especially if you know that there will be times when cash flow is tight. If you have excess cash, you may want to consider paying down debt, or investing in new equipment, or investing the funds for a time when you may run into a cash shortage.

What Next?

Take the time to understand the timing of your cash inflows and outflows, create a 12-month cash flow projection, and develop a plan for managing cash in times of shortages and surpluses. By doing so, you can ensure that your business remains strong, and you can count on getting a good night’s sleep knowing that you have a plan to manage your cash. If you would like assistance in developing a cash management system or just want some additional guidance, please don’t hesitate to contact our team members at TDT CPAs and Advisors.

Dan Montgomery, CPA and Partner at TDT CPAs and Advisors, discusses the importance of cash management systems within your business. With more than twelve years of experience, Dan specializes in audits of nonprofits, governmental entities, and employee benefit plans. Dan is a member of the American Institute of Certified Public Accountants and the Iowa Society of CPAs and serves nonprofit clients across all eight TDT office locations.