3 Reasons Why Cash Flow Planning Doesn't Come Easy
Posted by John Orlando on Tue, Dec 22, 2009 @ 01:32 PM
"Profits don't matter if you can't pay the bills". It really boils down to that.
This is a common lament we hear from many small to mid-sized businesses today as they struggle to navigate through these tough economic times. It's not whether your earn a profit or not. It's whether you have the cash to pay the bills. That's what makes the difference if your business survives or not.
Understanding your cash flow position at any time is critical to knowing if you can fund a particular project, acquire new equipment or hire new employees. Unfortunately, most CFOs don't have the information to answer those questions confidently.
Generating accurate, timely and dynamic cash flow reports is typically difficult for most CFOs and companies due to the cumbersome nature of most company's planning, forecasting and reporting processes as well as the limitation in most software tools and applications today.
The Reasons:
1. Spreadsheet as the primary planning tool
No dynamic links to the P&L and Balance Sheet; Spreadsheets don't understand accrual accounting. The reality, Accounts Payables and Accounts Receivables are too dynamic to be modeled in spreadsheets. You're left using averages or "guesstimates" that don't truly reflect your business and likely will skew your cash flow analysis.
2. Planning for cash flow at the 11th hour
Planning for balance sheet items, and resulting cash flow analysis, is left for the "last day" or eleventh hour. Typically, cash flow synchronization with the income statement and balance sheet is quickly performed by one person just prior to the sign-off on the plan.
3. Balance Sheet is built at the "50,000" feet level
Often the Balance Sheet is built at a very high level, due to time constraints and the pressure to get the budget "done" and consequently, the less precise is the Balance Sheet, the less precise is the Cash Flow.
More Information about Cash Flow Planning
If "cash is king" in your business and you're struggling to develop an accurate cash flow plan, you may want to check out this software package and see if it might be of benefit. For some practical advice on business cash flow planning, read this White Paper.
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