Cash Flow Plan – The Backbone of Proper Finances of your Business
What is cash flow planning and is it important to do a cash flow plan? In simple English terms Cash flow plan is planning the in flow and out flow of your cash. Each and every person, whether doing business or is employed somewhere, does cash flow planning. The only difference is of tenure and of the amount . When it comes to a salaried person or an employee he or she does cash flow planning on a monthly basis. Based upon the salary and all the other income of the person the inflow and outflow is calculated and by deducting both inflow and outflow the person comes to a conclusion as to whether he or she needs money to run the family for that particular month or he or she will have some extra cash in hand which can be used for any other purposes or can be put into savings. The concept of cash flow plan is the same for business units too. The only difference is the tenure for which the cash flow planning is done. For business unit cash flow planning is usually done on a quarterly basis. This helps them to have a futuristic approach and analyze and plan in advance in case of an eventuality.
What are the main ingredients of a cash flow plan? There are two main ingredients of cash flow planning, your income and your expenditure. The main purpose of cash flow planning is to increase the inflow and reduce the outflow as much as possible. You need to have a balanced approach to make sure that there are no steep rise and fall in your cash flow. If there is frequent steep and depth in your cash flow then it will affect your day to day activities of your business resulting in serious loss to your business ventures.
How to maintain a balanced cash flow in order to maintain a healthy state of business? You can either increase your inflow or you can keep a check on your expenses to maintain a balanced cash flow. There are many ways in which you can achieve this goal Let us look at a few ways you can have a healthy cash flow plan for your business.
- Revisit your clients and customers – The main source of your payment is your clients and customers. Revisit the credibility of their business. You might have agreed with a client on lowest rates in your starting stages of your business. Check out whether the rates need to be revised or if the revised rates are feasible in today’s financial and market conditions. Check which customers are making the payment on time. If there are a few customers whoa re not making timely payments then try to analyze the reason behind it is because they are having problems in their business and if so try to see whether you can offer to help them out. The reason for delay in payment might also be from your end. If invoices are not reaching in time and or if the invoices are not having the right information related to the payment amount then there might be a delay in the payment from the customer or the client.
- Check the frequency of payment – Check how frequently the payments are made. Try to get in touch with your customer or client and see if the frequency can be increased or early partial payment arrangements can be made before the delivery of the product or services. In that way you will not need to invest your own money fully into your business.
- Check our stock on hand and reorder level – It is good to have enough stock in hand to cover up for contingencies. But there are added expenses attached to the stock. There are maintenance cost and storage costs attached to it. If you have more than the required stock then you will need to pay for storage and maintenance of the stock and if your reorder level is too low then you might need to end up paying more for incurring your stock at the time of emergency. So check your reorder levels. Are they appropriate. Check the amount you’re paying in storing and maintaining the stock. If it is equal to or more than the cost of the stock itself then you will need to do replanning.
- Profit margins – Check the margin of profit that you had kept for each and every client. Is it feasible to do business with the profit margin that you had to keep when you started the business with the client. You might need to revisit to make some necessary changes and discuss the same with the client
Apart from taking some strategic decisions regarding your in flow, you also need to check as to how you can actually decrease your out flow. If outflow is not checked then in spite of the increase in cash flow you will only see a marginal difference in your cash in hand. So to have a perfectly balanced cash flow plan you need to revisit your out flow too. You need to see the items on which you spend more and more frequently. You need to understand whether it is necessary and if it then how a one time investment can solve your problem. You also need to differentiate between expenses which need to be incurred immediately and expenses which can be be stalled for the future. If an expense is not going to affect your day to day business activity then it can be incurred later.
