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VIEWpoint Issue 2 | 2022
Your business is in growth mode, so cash-flow management is no problem, right? The reality is that cash flow can actually be extremely tight during growth periods. For example, if your days’ sales in accounts receivable are at 40 days, and your sales increase by 10 percent, your cash in the business will need to increase by that same rate to keep you in a favorable cash-flow position.
That being said, it is a good time to review the fundamentals of cash-flow management to help keep those dollars flowing as your business grows. The accountants and advisors at top accounting firm Doeren Mayhew offer the following steps.
Look at Your Business Budget
It’s hard to know how to improve your cash flow unless you can sit down and see precisely where your money is going. That’s why the first essential cash-flow analysis tool is your annual business budget.
You’ll want to examine your budget line by line. Although maintaining a detailed budget for all company expenditures can be tedious, it’s fundamental to good cash-flow management. Your budget can facilitate expense tracking and help guide spending decisions to align with your business goals.
Items in your budget should tie into and support overall company business goals. If you can’t effectively demonstrate how an item enables a particular business goal, you should question its merit. This will help you avoid unnecessary spending and make more funds available for allocation to worthier business needs.
Also bear in mind that, for analysis purposes, a budget is useful only if you update it regularly to accurately reflect your actual spending. For instance, you may have overbudgeted or underbudgeted on some items and, thus, spent more or less than you anticipated.
Create a Cash-Flow Statement
With your budget as the foundation, work with your CPA to create a cash-flow statement. The purpose of this document is to report the net increase or decrease in cash for your business.
The statement factors in the cash inflows and outflows of daily business operations, asset purchases, sale proceeds and financing activities (loan payments and new borrowings). Because it excludes noncash accounting items, you can use it to pinpoint cash-flow problems.
If you want to get the most from your cash-flow statement, generating one monthly is best. But quarterly and annual statements can also be useful for identifying cash-flow trends. Accounting software packages can help automate and simplify the process of preparing these and other essential financial reports.
After securing an overview of your company’s cash flow, you can start examining specific areas. One in particular is expenses. Here, too, you should look to your records.
Maintaining accurate expense records gives a more complete view of your financial situation, putting you in a better position to effectively manage your company and ensure ongoing profitability. Accounting software can help you automate the meticulous process of expense account organization and records tracking.
As you review your expense data, seek out ways to reduce your company’s day-to-day operating expenses. For example, you may find it more economical to outsource noncore areas of the business such as human resources, payroll and benefits management or information technology support.
Or you might implement just-in-time inventory management, with suppliers maintaining inventory for your business as long as possible, saving you storage and interest costs.
Review Collections and Payables
Timing is critical when it comes to both the money coming in and going out. Conduct credit and reference checks on new customers to validate their payment histories and minimize the risk of collection problems. Consider requiring customers to provide deposits on product orders or services to be rendered and offering discounts for paying invoices early.
Invoicing mistakes may also hurt your cash flow. Prevent invoicing errors and costly collection delays by maintaining current and accurate customer account data. Promptly send invoices to customers — fax or e-mail delivery could quicken the process. Also, follow up quickly on past-due accounts. Don’t wait until accounts are 60 or 90 days late.
On the flipside, take a look at your payables. Generally, you shouldn’t pay invoices earlier than required unless you’re offered a discount. Use your buying power for large-volume and frequent purchases as leverage to negotiate discounts, free financing or extended payment terms.
Doeren Mayhew’s accountants and business advisors help clients create business budgets and implement cash-flow management strategies. For more information, contact our advisors in Michigan, Houston or Ft. Lauderdale.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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