Cash flow monitoring is the process of analyzing and projecting cash inflows and outflows to optimize cash flow. Effective cash flow monitoring ensures the business is liquid enough to cover its operating expenses, investments, and debt obligations.
One of the main reasons cash flow monitoring is so important is that it allows businesses to make informed financial decisions. By clearly understanding their cash position, businesses can confidently invest in growth opportunities, manage their debt obligations, and avoid financial crises caused by unexpected expenses or cash shortages. Cash flow monitoring is critical for businesses to maintain financial stability and achieve long-term success.
Tracking cash flow can be complicated, requiring assistance from a financial professional such as an accountant. However, if you lack an in-house financial professional, your best option is to hire one on a contractual or freelance basis. With an outsourced accountant, like the ones employed by Fully Accountable, you get the professional help you need at a cost you can afford.
The Basics of Cash Flow Monitoring
Cash flow monitoring begins with tracking cash inflows and outflows. In other words, that’s the money coming in and going out, respectively. Cash inflows and outflows are divided into three categories: operating, investing, and financing activities, which are explained as follows:
- Operating activities: This includes cash inflows and outflows that are directly tied to the company’s main business operations, such as sales revenue, payments to suppliers, and employee salaries.
- Investing activities: Long-term assets the company sells, such as property, equipment, or other investments, fall into investing activities.
- Financing activities: As the name implies, this involves anything involving finances, such as taking out loans, paying dividends to shareholders, or issuing stock.
Keeping track of all cash inflows and outflows is done through a cash flow statement, one of the three financial statements essential to any business. Balance sheets and income statements are the other two types of financial statements. Both are essential for crafting a cash flow statement, as both sheets have the most cash inflow and outflow information.
Brief Overview on Crafting a Cash Flow Statement.
- Before acquiring the necessary documentation to craft the cash flow statement, you have to select whether the statement will cover a month, a fiscal quarter, or a year.
- When all cash inflows and outflows have been placed into the above three categories, the next step is to calculate the net cash flow for each category – you do this by subtracting the cash outflows from the inflows for each category.
- Next, add the net cash flow for all three categories to get the total net cash flow.
- Typically, cash flow statements include the cash balance at the beginning and at the end of a period.
Best Practices for Cash Flow Monitoring
The constant watch of a company’s net cash flow is the best way to monitor cash flow. It’s a process that requires diligent professionals and a keen eye for detail. As financial professionals already know, this year-round process involves constant analysis of all cash inflows and outflows. This requires meticulous up-to-minute records on all financial activities that the company is involved in, from operations to financing. That also means the timely reporting of cash flow statements, but while it’s great to be informed of the company’s current net cash flow, it’s equally important to know a company’s future liquidity.
Cash Flow Forecasting
Cash flow forecasting works similarly to a cash flow statement, which tracks cash inflows and outflows over a designated period. The difference between cash flow management and cash flow forecasting is that forecasting looks ahead, giving decision-makers insight into the company’s short-term liquidity. Furthermore, financial professionals can utilize cash flow forecasts to calculate whether the company has enough cash to pay off loans, fund new initiatives to promote growth, or find potential issues that could impact cash inflows, like a client’s contract ending.
Strategic financial planning
Financial planning also looks to the future, presenting actionable steps a company can take to strengthen its financial position. This can include shifting resources to pay off debt faster, allowing the company to reach a position with access to more cash. In addition to getting out of debt, strategic financial planning can be used to plan for higher cash reserves, acquire a company, or tighten the budget to free up more cash.
Adequate cash reserves
Cash reserves are essentially a company’s savings account, a nest egg that can keep the company afloat should a rainy day ever occur. Like a personal emergency savings account, the cash reserves should be able to cover business expenses such as vendor and loan payments, employee salaries, and other operational expenses.
The question of how much a company should keep in its cash reserves depends on the company. Larger companies would need a lot more cash reserves, for example. Though the figure varies by company, it’s widely considered that a company should have enough cash to keep going for three to six months, at which point the ship would hopefully be steered back on course.
Cash Flow Monitoring Software
Financial professionals rely on accounting software to monitor and manage cash flow. Various software can do this, each offering different features. There’s no right or wrong answer when it comes to choosing a cash flow management software, though you’ll want to do some research to find one that best suits your financial situation. Whether you opt for one of the best cash flow management software or find something tailored to your business needs, accounting software is crucial to monitoring cash flow.
Get a Professional to Monitor Your Business’ Cash Flow
Cash flow monitoring becomes more difficult as you grow your business, but it’s an important part of any business interested in growing. While periodically creating financial statements is time-consuming, it helps you understand where you stand as a business owner. When cash flow is correctly monitored and managed, you can make informed decisions regarding business expenses such as purchasing new equipment, leasing office space, or hiring new employees.With Fully Accountable’s financial professionals, you can get financial statements when you need them, allowing you to make better financial decisions. Our outsourced accounting services can provide you with fractional accountants or fractional CFOs that work for your business for as long as you need their services.
To learn more about Fully Accountable outsourced accounting, contact us at +1 (877) 330-9401.
Fully Accountable is an outsourced accounting and fractional CFO firm that specializes in ecommerce accounting for online businesses. As a Inc 5000 fastest growing companies award winner, our diverse team of accountants, bookkeepers and CFOs can help you improve your cashflow and effectively manage and grow your bottom line.
