But what is cashflow?
As an entrepreneur, it is very important for you to see exactly the movement of money in your company as the solvency of your enterprise depends upon it. Cashflow is the movement of money which provides solvency.
Many companies do financial planning, which sometimes is the same as the yearly financial planning which they have to give to the bank. When it is only used for that, the plan usually ends up in a drawer, even though with the help of an accurate cashflow report fully understood, you can make 10s of thousands of dollars more with your enterprise...
Most of the small and middle size companies have recognized the importance of accounting, but unfortunately some of them try to use solely accounting if they want to know something about the company's money movements.
The subsequent recording of data and money movements is important, as you can see bigger correlations from it. But to plan the future based only on past accounting data is dangerous.
Beginner executives tend to think that the role of accounting and finance is the same, but they don't know that a whole slew of problems come about from mixing the two.
Accounting is useful and necessary, but not sufficient for financial planning, to steer your company in the right direction. Accounting documents what transactions happened in the company. An accountant would count an item as income when it is invoiced out even though money is not even on the horizon yet.
Successful entrepreneurs agree that using accountancy to control the company's cashflow is practically impossible, it causes numerous misunderstanding, inaccurate data, lapses in paying on time if it is used for that.
That brings up the question of do we want to be ahead of things financially or behind? Do we want to plan the movements of money and do what is in our plan, or we just acknowledge the expenditures and income of the company afterwards?
It is true to the entrepreneur and the enterprise itself, that they are efficient to the degree they can control their future. As responsible executives, we have to plan and foresee our finances 1-3-6 months ahead, so we can handle any possible future liquidity problems.
How the cashflow management approach can help you?
When you apply the methods of cashflow management, you can keep up your solvency on the long run.
What does it mean being solvent continuously? You have to have enough money to be able to pay your current liabilities.
This depends on what amount comes in and goes out from your company and in what time frame.
Cashflow is the correct way to handle and control the movements of money. It shows you based on actually flows of money not based on accountancy data, how regularly your company can pay its bills on time.
Correct cashflow management is basically when the amounts and the timing is sufficient to always have money to pay the bills. Cashflow for a company is like blood for the body: transports the energy needed to operate. If it works well, we don't even notice that we have blood and that it flows. But when this stable operation gets disturbed, the person – and a company alike – will be incapable to function, produce, or at least only in lower quantity, sickly.
An energetic entrepreneur continuously searches for new products and new markets: improves his products, increases his salesman's efficiency, tries new marketing tools. Much less of them analyze the possibilities hidden in the company's money management, thereby throwing out thousands out the window.
After analyzing the cashflow, where can you find hidden reserves in your company?
- If you sell Products A, B and C, after a little analyzing, you find that taking the speed of sales, costs of storage and profit margins into account you barely make profit on Product C. A solution can be: you sell out Product C and invest your money into Products A and B.
- If your Stores E, F and G all together bring X dollars in profit, but analyzing them one by one it turns out that Store E brings you Y profit, Store F brings you Z profit, but Store G produces X loss, then it is worth to either get rid of the store producing minus or make it profitable very fast.
- If your company is on market P and market R with two different products, and your income is X thanks for the two income sources, it is good to examine how much capital investments the two areas require. If you have 1.5 million dollars income from both markets, but market P requires 1/2 million dollars investments for purchasing machinery, and market R only costs you 50,000 dollars, then it's worth to come out from market P and invest your money into market R.
I offer you 3 different choices with which you can discover the millions hidden in your cashflow records.