Cash flow planning is an integral part of business sustainability. Much like the heart in our body, we can’t live without it. Cash flow is the heart of a business; we can’t stay in business without cash flow coming in regularly.
Although the concept of cash flow planning is the same for both product and service oriented business, the business that sells products need to pay particular attention to timing of cash in and out. So what does cash flow planning means, let me begin by providing you with few helpful tips and some important questions that need to be answered:
It is important to ensure purchases of products for resale are carefully balanced to ensure investment in carrying inventory is minimized. This is a delicate balance as you want your customers to view you as the go to company for your particular product.
The above note will help free cash tied in idle inventory and minimize the need to finance vendor payments while waiting for customer collection.
Below are some of the questions to keep in mind when cash flow planning:
- Be aware of your credit terms to customers. What is your credit terms, 30 days, plus? How long after the sale does it takes for the funds to come in?
- What are the business overhead (fixed) costs monthly? Rent, utilities, phone?
- What is the timing of theses overhead (fixed) costs?
- What is the timing of the fixed and variable costs?
- What are the business variable costs that fluctuate with sales?
- For service oriented business, what is your direct labour cost? And the timing of paying these labour costs?
- What about labour costs? How much is fixed and how much is variable with sales?
- What are the statutory taxes relating to labour costs? And their timing?
- What about GST that has been collected less GST that can be claimed? What is the timing of actual remittance? What about PST remittance, if applicable?
- Are your receivables from sales closely matched in timing and dollars to your fixed and variable costs?
- What is your sales forecast? It is important to tie the sales forecast to actual cash inflows.
The above are helpful tips and questions that need to be asked when considering cash flow planning. The road map to maintaining a healthy heart!
Written by Sylvia Katz, CGA owner-manager of accounting firm. www.katzaccounting.ca