
Careful monitoring of your business liquidity or cash flow is key to sound financial management. It makes it easier for you to overcome obstacles such as inflation, supply chain issues and labour shortages. Here are some tips to help you calculate and optimize your cash flow.
The purpose of business accounting is to track cash inflows and outflows so you can analyze your company’s financial performance.
There’s a direct link between your cash flow and your business accounting. Having up-to-date data will make your business accounting more effective. That’s why it’s essential to check your cash flow on a weekly or monthly basis to know where you’re at.
When times are tough, you need to pay even closer attention to your management and business accounting.
You need to keep a close eye on your cash flow to ensure you’re making the best use of your company’s liquid assets. “Cash flow” refers to how much cash your company takes in minus how much it pays out. It is influenced by the company’s cash-in model and how it pays its day-to-day expenses, such as salaries, purchases, rent and other fixed costs.
By estimating your future cash flows, you will have a good idea of how much cash you will have left, or need, at the end of the month.
You also need to track your working capital, which consists of your company’s short-term assets minus its short-term liabilities for the following year.
Once you’ve tallied it all up, put your results in perspective by answering the following questions:
Good to know: The cash flow equation assumes that all short-term assets will be converted to cash in a timely manner. This is not always the case, however. You should keep in mind that some variables may change the way your short-term assets are calculated.
If business slows, a decrease in cash receipts due to longer collection times could put pressure on your cash flow, since you’ll need to keep making your monthly payments regardless.
To make sure you’re ready for whatever comes, calculate three different cash projections based on three different scenarios (optimistic, realistic and pessimistic) for a set period of time. This will give you a clearer picture of your company’s financial situation, no matter what happens.
Your financial statements may show a financial situation that at first glance seems healthy, but with a high number of accounts receivable and a large inventory that actually mask a cash shortage. Without adequate cash or financing, your company may not be able to meet its obligations related to purchases, salaries, rent or other fixed costs. If that’s the case, you’ll need to increase your cash flow as quickly as possible.
A number of measures can help you increase your cash flow. Here are a few:
Hard times don’t last forever. A challenging situation can be a great reason to do a full review of your company’s internal processes. Focus on improving and automating your processes. For accounting, consider using a cloud-based accounting platform.
Whatever the case may be, get expert advice before making a decision. Feel free to contact your accountant, account manager or a National Bank advisor to discuss your situation.
Have questions? We’ve got answers.
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