Cash Flow Projection- A Vital Component of Business
A proper amount of cash flow projection is necessary for a business to flourish. The projection of cash flow will determine the outcomes whether your business is able to maintain a positive outlook. This is all the more important when a business is in the start-up phase. Normally the cash flow of a business begins with the cash at the start of the business and ends with the closing balance of cash after a set period of time. Other than this the cash flow can be structured by considering a different variety of options. Now how one does this structuring? Normally there are three ways assigned to it, which are cash from operations, cash flow from financing activities as well as cash flow from investments. Now there is a need to understand all these terms in general. Cash flow from operations means the money flow from the daily activities of the business, whereas cash flow from investments means the money arising from the investment activities of the business. Cash flow from financial activities means the money arising from the various financial activities of the business. A typical example of such activities would be taking out a bank loan.
Managing cash flow projection
Before one learns to manage cash flow projections, they need to understand on how to manage cash deficits. This is a scenario when a lot of payments are due from the market and the organization cannot even meet the day to day obligations of the business. An example will drive home this point on a clearer level. Suppose an organization has a cash deficit for the month of January, this does not mean that there is an overall cash deficit for the company. It is in fact restricted to that particular month. On the other hand it will reveal how much cash the organization needs to explore the options of expansion as well. This in fact is the prime objective of a good cash flow projection. It gives you sufficient amount of time to explore the pitfalls of cash, rather than reacting at the last minute. Even when one has a shortage of cash, they are some expenses which they have to pay. Examples of such type of expenses are insurance as well as taxes. One of the effective methods of managing a cash flow projection is to draw a line of credit. One of the major software in accurate cash flow projection is the cash flow Mojo.
Importance of budget in cash flow
For the management of cash flow projects budgets are of paramount importance. In general a cash flow statement is prepared on the basis of experience of the individuals. So what are these budgets, they specify the plans in which the objectives of the business are to be achieved. In normal terms money is the main measuring yardstick in the case of budgets, but other performance indicators like outputs may also be included. In the midst of this the difference between the actual and the expected performance and the difference is known as the variance. The variance is also a very important tool of the business as it helps them effectively manage the business. A variance may be favourable as well as unfavourable. The former indicates positive growth of the business while the latter indicates a downfall of the business. Another important importance of budgeting is that it gives managers greater control over the daily affairs of the business. If the costs are too high or the sales are too low the management can take proper action. In the midst of this it takes the business forward. So it is quite clear that cash flow projection is part of the budget control mechanism
Evolution of technology in cash flow
With technology evolving leaps and bounds in the last decade or so, in recent times various forms of budget software have developed. The primary focus of this software is to integrate the budget and the planning aspects together on a common platform. In addition to this management reporting as well as re forecasting, are also important. With the help of the budgets the cash flow projection are put in proper place. One is supplied with a starting balance sheet and from this the revenue sheets in the form of profit and loss, expenses as well as dividends are calculated. So what are the driving forces for this software to have shot into prominence on a large level? A few reasons are depicted below
- It is simple and easy to use
- Possibility of errors is reduced with the development of perfect budgeting solutions
- The accuracy as well as the integrity fact of the cash flow statements is never in doubt
- It is possible to do calculations, as they are done automatically
- Since the double entry method is followed the auditing procedure is pretty simple
Importance of cash flow
So it is quite clear that cash flows are the lifeline of the business. If the business cannot meet the cash flow projection then there is a strong chance that they will become insolvent. In this regard the management cannot come up with an excuse that they did not see such a situation coming. In short one can refer it to as a situation where the cash is king. It is all the more important for small and medium sized business. So on all counts the management should predict the cash flows for the successful running of the business.