Quick . . . What does your company's cash position look like for the next thirty days?
If you can't immediately answer that question, you're in trouble. Whether it's short or long, monthly cash flow has a major impact on the management decisions you'll make over the next few weeks.
Monthly cash flow projections give company leaders an accurate estimate of short-term cash resources. If your accounting department is on the ball, creating a monthly cash flow projection shouldn't be difficult. But if monthly cash flow projections never leave the accounting department, they have no functional value. To be useful, cash flow analysis reports have to be integrated into the management chain and consistently applied to short-term decision-making routines.
At a minimum, it's useful for managers to understand the process that goes into generating a monthly cash flow analysis. If your company doesn't currently perform a short-term cash flow analysis, here's a step-by-step process for creating monthly cash flow projections that produce actionable intelligence about liquid assets.
- Cash on hand. Cash flow analysis starts by identifying the cash on hand at the beginning of the month. Don't modify this figure to account for receivables or other variables – just transfer current cash account balances to the first line of the form.
- Cash receipts. Next, estimate the cash receipts you expect to receive during the course of the month. This includes cash from sales, leases, receipts on receivables and more.
- Total available cash. The sum of the cash on hand plus estimated cash receipts is the amount of cash your company will be able to access during the month. However, be cognizant of the fact that you won't have all of it on hand at the beginning of the month.
- Cash payments. Before you can determine a monthly cash position, it's essential to identify sources of cash expenditures that will occur during the month. Cash payments cover an exceptionally broad range of expenses, but any expenses that will be paid from checking accounts in the next thirty days should be included in your calculations.
- Monthly cash position. Total available cash minus cash payments determines your monthly cash position. This may not reflect profitability – especially if your business is seasonal or you have deferred payments.
- Other useful data. Monthly cash flow projections sometimes include non-cash flow data like sales volumes, accounts receivable/payable balances, inventories and other useful information.