Every business strives to pull in revenue that will ultimately boost the bottom line. However, keeping your company in prime shape to seize profitable opportunities and overcome financial challenges relates to another objective: having a healthy cash flow.

Every organization, with enough time, will experience strong economies and repressed ones. As captain of your proverbial ship, your job is to ensure your business sails the seas on a healthy cash flow in good times and bad.

Success Comes in Waves

The cash flow success of virtually any company depends on two cycles: sales and disbursement.

The sales cycle includes how long it takes your business to 1) design, develop, and produce or provide a product or service; 2) market that product or service; and 3) eventually close a sale and collect the accounts receivable.

The importance of collections cannot be overstated. From clear, accurate invoicing to using bank lockboxes for faster access to money, collections remains a major aspect of cash flow management.

Many companies either underestimate the difficulty of the sales cycle or lose sight of its tendency to gradually expand in length. The former problem often affects start-ups. Entrepreneurs may believe they can get their wares to market, close deals, and collect on them more quickly than reality allows.

The latter quandary, losing sight of the elongation of the sales cycle, can affect even well-established companies. Regular customers may start taking longer to pay, or a major buyer might jump ship and be harder to replace than expected.

The second cycle, disbursements, entails the process of managing the regular, outgoing payments to employees, vendors, creditors (including short- and long-term financing), and other parties. Outgoing payments affect cash flow.

The sales and disbursements cycles overlap. If they don’t do so evenly, your delayed cash flow can create a crisis. Business owners need to understand the interaction between the money being spent to generate revenue and the revenue actually being generated.

Just as you work to match revenue to expenses, you also should ensure that your sales cycle (cash inflows, including outside financing) at least matches your disbursements cycle (cash outflows). Ideally, you convert sales to cash more quickly than you pay expenditures — thereby strengthening cash flow.

Full-picture Accounting

As your sales and disbursements cycles roll along, your company generates data. Failing to process this information completely and accurately could lead to cash flow confusion — or worse.

If you do not leverage the power of today’s financial software, you leave yourself vulnerable to the whims of fortune. At minimum, your accounting system should allow you to enter common transactions such as logging cash receipts onto deposit slips, cash disbursements onto checks, and purchase and sales transactions onto orders and invoices, respectively. Consider, also, how you may be able to automate some of the processes, saving both time and money.

From there, review your use of ledgers. Every basic accounting system has a general ledger. But you may need a system with multiple subsidiary ledgers and special journals that simultaneously post when documents are saved.

Report generators are also critical for managing cash flow accurately. Your system should allow you to readily generate accounting reports — daily, weekly, monthly, and annually. This means being able to easily record and access recurring transactions as well as accounts payable aging and payment scheduling.

Today’s accounting systems also can provide you with a “dashboard” of real-time information and decrease the likelihood of being caught off guard by cash flow disruptors. In addition, budgeting tools can help you set and monitor budgets, perform “What if?” analyses, and compare actual results to goals.

A Manageable Voyage

Determination and adept planning lead to effective cash flow management. If you keep your eyes on the horizon and monitor the right metrics carefully, you should experience, if not smooth sailing, at least a manageable voyage toward profitability.

If you need assistance navigating your data, our business insights and analytics team members can help you set up and utilize a customized dashboard to help you meet your cash flow goals. Call, email, or complete the contact form to let us know how we can help you take the next right step.

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© Copyright 2021 Thomson Reuters. 

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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.




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