Tuesday, July 5, 2011

Cash Flow Goofs

Cash is king in a small business. Understanding and accurately forecasting your cash flow is probably the single best predictor that your company is thriving.

Here are some of the most common errors businesses make when forecasting cash flow, courtesy of Sageworks:

1. Under-Committing. Don't delegate cash flow forecasting to junior-level employees who might lack the understanding of company finances, or overloaded senior staff who lack enough time to dedicate to the area.

2. Over-Optimism. One of the main dangers of cash flow forecasting is overestimating sales. On the flip side, organizations tend to underestimate the occurrence and impact of negative events, making it difficult to recognize and plan accordingly for potential worst-case scenarios. You should always draft best-case and worst-case forecasts and put them to the test to better prepare for potential positive and negative impacts on cash.

3. Not Updating. It is very important to regularly compare your actual cash flow with your prediction so you can make necessary adjustments. It is unrealistic to expect a perfect cash flow projection at first; however, if you review your actual results with regularity, little significant variance will occur.

4. Lack of Communication. Avoid operating within a vacuum and include all members and areas in your organization when creating a cash flow forecast. Developing these communication channels is key to creating an exhaustive cash flow projection. Staff and members of the management team should review the tentative projection and ensure that their initiatives are accounted for.

5. Late Loans. If you think you are going to need a loan, it is better to get one early. A strong cash flow projection will show a loan officer that your business is a good credit risk and a good candidate for a short term loan or line of credit. People tend to overestimate the availability of loans, grants, credit and equity, and this can have a devastating impact on your business later on.

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