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Having a good cash flow management system in place is crucial for every company and even individuals. For an individual with steady, regular streams of income and predictable spending patterns, managing cash flow is not complicated.
When it comes to companies with multiple revenue streams and multiple cost centres, managing cash flow can become complicated and even cumbersome. Nevertheless, all companies should do it as part of a good management system.
Without good cash flow management, companies may find themselves running into liquidity issues. Lacking the proper foresight, it will be hard to plan for the company’s future direction and strategy. It will also hinder any future development without knowing the company’s liquidity position.
Here are some simple steps for you to begin implementing an efficient cash flow management system.
Step 1: Forecast Accounts Receivables
This should come from your sales and business development department and any department that brings in accounts receivables. Most companies don’t operate on a cash basis and revenues usually come in the form of accounts receivables.
Have your sales and business development departments prepare a forecast of sales for the next period – monthly, quarterly, or yearly – depending on how regularly you want to conduct this exercise. It is recommended to do this monthly if your business cash flows are huge.
Step 2: Forecast Accounts Payables
With the accounts receivables projections in, the next estimate is your accounts payables. This should be done in conjunction with your operations department and other relevant cost centres and sometimes can be done concurrently with step 1.
If done concurrently, you should also take note to include any cost associated with generating the accounts receivables forecasted in step 1.
Step 3: Verify Forecasts
No forecast is complete with verification and approval. The projections in step 1 and 2 must be verified by the finance department to ensure the accuracy of projections as well as the validity of assumptions used in step 1 and 2.
Many times, the projections in step 1 and 2 might become or be related to the KPIs for the relevant departments. In this case, additional layers of review and fine-tuning might become necessary.
Step 4: Perform Financial Analysis
With the completed and approved projections, the finance team should perform a financial analysis on the final figures. They might consider trend analysis, ratio analysis, benchmarking and comparison. This will allow you to understand the company’s current liquidity position as well as what to expect in the coming period. Sensitivity analysis may also be carried out.
Step 5: Discuss & Prepare Action Plan
After the financial analysis, prepare an action plan relating to the company’s cash flow. This varies from company to company depending on what your liquidity policy is. Some companies might invest additional cash in fixed deposits or bonds. Some will require hedging actions. If the company is short of cash flow, tough decisions will need to be made.
Step 6: Implement Action Plan
Appoint a task owner to be responsible for ensuring that the action plan is carried out as well as to make any contingent decisions. The person-in-charge should also monitor the cash flow position should the actual deviate from the forecasted significantly and take action appropriately.
Lastly, all information should be properly documented and kept for future planning purposes. Any significant deviations should also be investigated and documented accordingly. This will go a long way for companies wanting to grow and expand as cash flow is a crucial factor in the process.
