If your company is alive and operating, you have cash flow. However, that river of green may not be flowing as much as you’d like, or you may be uncertain about whether it’s flowing the way it should be. So let’s see if we can match up the kind of business you have with the most appropriate types of cash-flow management tools that will keep you in the loop of how your business is doing.
Credit and Collections
If you manage a service business and you do not typically extend credit to customers and you have just a few major customers, just about any cash flow management system will work for you. You may be perfectly satisfied with the cash flow management capabilities built into your business accounting system. Or you may prefer a more flexible spreadsheet-based approach, which permits easy “what-if” projections so you can account for future business uncertainties.
The need for “what-if” scenarios is important for businesses that do not have easily predictable financial results due to the nature of their work. For example, cash flow may be highly dependent upon the timing of the signing of a large contract that provides an upfront payment. You would want to project cash flow scenarios both with and without the contract to see your options.
If you grant credit, and particularly if you have many smaller customers to keep track of, you will almost certainly benefit from some automated system to manage credit and collections. Most sales and accounts-receivable applications include capabilities for creating invoices, periodic customer statements, and dunning letters. More sophisticated applications may include related capabilities in a customer relationship management function.
If you have all the complicating factors, many products and many customers to whom you grant credit, you’ll likely need a combination of cash flow management and some way to bring it all together, such as a spreadsheet or overall cash-flow-projection calculator. A good cash flow management system should be easy to use, offer flexible “what-if” and reporting options, and allow you to update projections once actual results are available.
If you sell many different products, particularly ones that may decrease in value over time, you need a good inventory-management solution to identify slow-moving or end-of-season/line products. You won’t sell many winter coats after February, for example, so maybe you should plan to put the slow-movers on sale in January. The information you need may come from an existing inventory report, or you may need to extract information from the inventory and sales database and use a report-writer application to get the information in a form that’s most useful to you.
Basic applications for accounts receivable and inventory will calculate ratios and relevant percentages that highlight how well you’re doing in converting those assets to cash. A growth in the percentage of customer accounts still outstanding after 90 days can be a bellwether for collection problems. An increase in inventory that’s disproportionate to the increase in cost of goods sold may indicate a buildup of slow-moving stock.
Frequency of Projections
The importance of ease of use depends on how frequently you need to use your cash flow management system. Many businesses will calculate and update their cash flow projections monthly. A few small or cash-flush businesses may only need to look at it once a quarter. Larger companies, or ones walking a financial tightrope, may manage their cash daily. If you need to use your cash flow tool often, you will learn its ins and outs and capabilities over time and become expert in its use. If you use the tool only occasionally, it’s very important that it be easy to use effectively because you don’t want to have to relearn a complex tool each quarter.
Since managing cash flow is a never-ending task, you’ll usually want some way of easily updating your cash flow projections from the last period to include this period’s actual results as a basis for moving forward. A cash flow tool that’s integrated into your business accounting system will usually have this capability. Otherwise, look for a way to easily export your actual numbers from your accounting package and then import them into your cash flow tool. Many small business accounting programs have capabilities to export financial results to Microsoft’s Excel spreadsheet, for example. Some features that may not be essential in your cash flow management software might prove useful if you can pay extra for a more complex program.
On the accounts-payable side, basic payment systems resemble checkbook writers, rather than true accounts-payable management applications. They assume you will create a check at the same time you enter the supplier’s invoice. A true accounts-payable system will let you enter an invoice with due-date information. You will then have the opportunity to decide whether you wish to issue a payment on or before the due date or to delay payment. In a cash crunch, for example, you may wish to delay payment of invoices due after 30 days to the 60-day mark. A good accounts-payable system will provide a schedule of estimated future cash payments, day-by-day if necessary, based upon the invoices entered into the system.