Cash flow is the lifeblood of any business, and it is essential to monitor the cash inflows and outflows that result from your day-to-day operations. Therefore, when we create cash flow strategies it is critically important to manage both sides of the balance sheet – assets and liabilities.
When you borrow money to buy equipment, inventory or buildings you essentially use future cash flow to make your purchases. Basically, you need positive future cash flow to pay for your debt commitments. Companies commonly have long-term loans and short-term credit accounts. Each loan requires monthly payments. The obligation to make these payments on an ongoing basis restricts your free cash flow.
Debt Servicing and Your Balance Sheet
Very little of your debt activity affects the Profit and Loss Sheet. In fact, when it comes to monitoring debt, you need to watch your Balance Sheet. That is because the principal portion of the loan payment is posted on the Balance Sheet while the interest is posted on the P&L. It’s important to watch your debt servicing by utilizing an extra column to see how much money is going toward decreasing the liability each month. Remember, the Balance Sheet totals you see are a running total since the start of your business. If you don’t add a comparison column to this report, you cannot see how much money is posted to each month or on an annual basis.
When servicing debt, you need to have a strategy from a cash flow position. There has to be intention as to how much money can be allocated to service debt on a monthly basis. If you are not paying off your credit cards or line of credit, you need a strategy to know how much cash you can take each month to reduce this debt.
Dirty Little Secret of Cash Flow
By adding a 30-day column, you can see how much your principal payment is that is taking up cash requirements. If you totaled all the money that is posted in the 30-day column and multiplied it by the number of months for your year to date Profit and Loss; then subtract that total from your Net Income, you will have a Report Card Balance of what your Net Income is showing.
Cash flow consultants, like me, take a deep dive into your books and strategize ways to limit liability, offset debt, increase profits and keep your cash flowing. Following a review of your financials, I provide you with the tools and education needed to feel totally empowered while making informed business decisions regarding your company’s cash flow.
Cash Flow Forecasting App
An exciting new way to manage your cash flow is coming soon! I am creating a custom cash flow forecasting app to allow users to take control of their cash flow by uploading their own information to gain immediate insights. Users will be provided an 8 month view into the future of what cash requirements will look like! The product is scheduled to launch 2nd quarter 2018!