What is Cash Flow Planning?

What Is Cash Flow Planning?

In simple terms, “cash flow” refers to all forms of cash and assets that come and go from anyone. Companies value cash flow because it offers a clear distinction between what they owe and what they’re earning.

Business Cash Flow Planning

Many businesses have a cash flow plan in place to ensure that they’re properly balancing costs and earnings. These might include operating expenses like salaries, rent, taxes, loan payments, equipment purchases, raw materials, business permits and more. But when you make a sale to a customer, that money creates a positive impact on your profit and loss (P&L) statement.

Without a proper cash flow plan, a company may not be able to sustain its business model. This could have dire consequences, as it then may be forced to raise expensive short-term capital, get a loan or even shut down completely.

To create an adequate cash flow plan, a business should note how much it plans to spend and earn in a given period of time. This can be done by subtracting the company’s accounts payable by its accounts receivable. Here’s a breakdown of each:

  • Accounts Receivable – This account tracks the assets coming into the business. In most cases, this is the money earned from goods and services you provide.
  • Accounts Payable – A company’s liabilities are tracked in this account, including payroll, loans and more.

For example, assume that Company A expects to sell 500 units a month at a price of $100 each. Altogether, expenses and employee wages for that same month are expected to be $40,000. However, because the company has a loan to its name, it owes the bank $5,000 this month. In the end, that leaves Company A with a positive cash flow of $5,000. It can use that money to help further pay off its loan or the funds can be reinvested back into the company for some other purpose.

Just because the previous calculation is positive doesn’t necessarily mean the company has a positive cash flow. This is because a business could theoretically make more money than it has paid out, but those incoming funds may still be pending in accounts receivable. As a result, the money won’t actually show in the company’s account, making its cash flow lower than its profitability.

We can assist you with proper cash flow planning. Planning is particularly crucial in a crisis. We will plan based on multiple scenarios to ensure you are prepared for most circumstances. Click HERE for more information and call us at 813-855-5433 TODAY

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