Cash flow is the lifeblood of any business, no matter how small.
In other words, cash flow must be managed properly so that the company always has sufficient funds available to meet its payment obligations.
It’s not the same thing for a company to be profitable as it is to generate liquidity. A company may sell a lot, but if it doesn’t collect payment for those sales, it has a problem. And if it does collect payment, but does so late, it still has a problem that could ultimately lead to the company’s closure.
That is why every business and entrepreneur faces constant risk, which requires dedication to managing cash flow.
When customers are late with payments, when unforeseen events arise, or simply when expansion requires an investment of funds, it may be too late to secure the necessary liquidity.
How, then, can a small business owner anticipate liquidity needs?
To address liquidity challenges, every business must plan its cash flow and maintain a certain level of “savings.”
When you create a cash flow budget and follow it consistently, you know exactly how much liquidity you have available to take the next steps. Adopting a forward-looking management approach is the most effective way to maintain good control over the company’s funds.
Creating an annual cash flow budget broken down by month is the first step. This budget details monthly receipts and payments for each budget line item, taking into account time lags between sales and purchases and their respective collections and payments, and includes the corresponding VAT on revenue and expense items in the overall budget.
You must also take into account financing items (loans, grants, capital contributions, etc.), investment items, and items that are sometimes overlooked, such as interest payments, social security contributions, and taxes…
With the cash flow budget, the business owner can plan the credit needs that must be secured for specific periods and amounts.
To strengthen planning, this budget is then translated into a daily cash flow plan by creating a shorter-term forecast covering 30, 45, or 60 days.
In the cash flow plan, receipts and payments are already confirmed transactions; they are recorded with their corresponding due dates, and you can determine exactly (theoretically for receipts that depend on customers) the amount to be paid or received, as well as salaries, taxes, etc.
With the cash flow plan, the business owner can see what is actually happening each day and analyze any deviations and the impact they will have on their actual cash position.
Each day, they can compare forecasts with actual bank balances to determine the real-time position of their bank accounts and a projected position for the next 30, 45, or 60 days.
This“reconciliation”of forecasts will also allow them to detect banking errors, unmet conditions, or improper transactions.
Tools like Excel allow you to do this planning, but tracking them monthly, weekly, or daily—depending on the complexity of the business—can be more or less time-consuming.
In fact, generating collections and payment forecasts can be very labor-intensive and
end up costing the business more than it’s worth
for the business owner.
Today, there are tools dedicated to this, such as SeeDCash, which allow you to spend just a few minutes a day to maintain precise control over cash flow and make financing decisions as far in advance as possible.
SeeDCash is a smartphone and tablet app that generates forecasts using a predictive model based on historical data, or allows you to create them manually or through automatic integration.
Every day, the app automatically and intelligently reconciles the forecasts with bank account transactions and displays liquidity indicators and alerts.
This way, business owners can see at any time if they’re going to run short on liquidity and can request financing for their business for the exact term and amount needed, avoiding over-financing and incurring higher financial costs that erode profitability.
In these cases, it’s essential to have a quick solution like the one offered by WorkCapital, which also provides expert advice to strengthen your company’s finances.