To be successful, a business has to have excellent cash flow management. A healthy cash flow will ensure that you can meet all demands on finances, even though your customers may not always pay in a timely manner. Poor management of cash flow can be the cause of business failure, but careful analysis of it can help a company to thrive.
What is cash flow analysis?
The analysis of a company’s cash flow is often part of a management accounting service, and looks at the income and expenditure of a firm during a specific timeframe. During this period, the expenses paid and all cash receipts are accounted for, with an end balance being generated when all amounts are totted up. Analysis may take place every month, quarter or year, depending on the company itself. This allows the business to spot any problems and put a solution in place to prevent them escalating.
Why do you need cash flow analysis?
By analysing cash flow and producing a forecast, you will be able to spot areas where there could be problems. For instance, when you accept an order, you will have to pay for materials and other expenditure in order to fulfil that request. It is likely that you will not receive payment for your goods until 30 days after the order has been fulfilled. Your business will have to pay the expenditure upfront, which could be a drain on finances. By producing a forecast, you will be able to organise finances, either by cutting costs or borrowing more.
Planning for the future
Cash flow analysis enables the company to see how it has performed to date and to plan for the foreseeable future. You will be able to produce a forecast that indicates either a positive or negative cash balance at the end of each month. This helps with future planning.
If you wish to expand the company, the analysis will provide information of the firm’s finances, and whether you need to apply for funding. You will also be able to spot weak areas of the business, so that you can take steps to strengthen the company.
Cash analysis can be complex, but is worth the investment of resources as it could prevent future problems of the company. If you would like to know how to put cash analysis in place for your business, contact us today to make an appointment.