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Cash flow planning is a vital process to building a healthy business, understanding a business’s working capital, and ensuring enough cash to meet its obligations. It is imperative for the growth and shaping of the business’s future. A major contributor to the failure of small businesses is cash flow problems. Therefore, cash flow planning should not be an afterthought. It is creating a budget of a business’s future financial position based on anticipated inflows and outflows. It sometimes requires a tremendous amount of data, which may create challenges for management when preparing their cash flow budget. The following are some of those challenges: Underestimating or Overlooking Overhead Costs – Overhead costs can eat into profits quickly. Therefore a business would need to sell more to cover these overhead costs or to break even. Underestimating or overlooking these costs could use more cash than anticipated, causing cash flow problems for the business. Preparing a budget to identify these costs will help a business better plan to cover overhead costs in future cash flow projections. Expecting Profitability Too Quickly – It takes time to build a profitable business and continue to be profitable as it grows. Overestimating a business’s growth could cause cash flow issues, especially if expenses outweigh the growth of revenues. Setting a more realistic time frame for growth and profitability will allow management to better budget cash flow, so there is enough cash to hold the business over until profitability goals are reached. Timing and Collectability of Accounts Receivable – A business can be successful and still have cash flow issues if customers are slow to pay. The timing and collectability of accounts receivable can be due to various factors such as different payment terms, business cycles or seasonal demand, customer payment behavior, time of purchase, and delivery of goods and services. Slow payments on accounts receivable could make it hard to pay bills and slow the growth of the business. Consider the timing and collectability of accounts receivable when preparing a cash flow budget. Ensuring processes are in place to extend credit to customers who have a history of making prompt and on-time payments can help manage the unpredictability of accounts receivable. Erroneous Estimation of Business Parameters or Inaccurate Data – A cash flow budget is highly reliant on the input of many parameters and many people depending on the size of the business. Therefore, management is dependent on the knowledge of those contributing to the cash flow budget process. Inaccurate information or gaps in industry knowledge could lead to potential over or under budgeting of cash flow, increasing the likelihood and impact of negative events, which could adversely affect the business. Educating and training those involved in the cash flow budget process can help close the industry knowledge gap, thus reducing the risk of using inaccurate information to develop the cash flow budget. Not Having a Dedicated Team or the Entire Organization on Board – The process of preparing a cash flow budget relies on others within the business. Thus ensuring continuous engagement in the process from everyone can be challenging. Delegating to those who lack experience and understanding of the business and overburdening senior staff could cause the team not to be fully dedicated or on board with the cash flow budgeting process. Getting buy-in from personnel and open communications is key to the success of cash flow budgeting. By assigning a dedicated team who are aware of the business’s history and are knowledgeable in the industry the business operates in, it will help ensure the accuracy of the cash flow budget. Globally, there are more small businesses than any other type of business, and inaccurate cash flow planning is one of the main reasons many small businesses fail. Bringing in an expert to help with your cash flow planning can be a valuable tool to help reduce the risk of inaccurate cash flow budgeting. The following are other ways an expert can be a helpful, trusted advisor to help with your cash flow planning:

• Educating and teaching vital cash flow planning skills
• Identify and provide solutions to business risks within your cash flow plan
• Build confidence in the cash flow budgeting process
• Provide reporting and analysis expertise
• Help to recognize and minimize any challenges in your cash flow process

Cash flow planning is a vital process to managing the working capital and can be daunting. Unfortunately, many small businesses do not have the correct tools, technologies, and processes in place to minimize the risks and challenges of cash flow planning. It is important to recognize and avoid these challenges and regularly keep an eye on your cash flow to avoid any problems that may arise. Having an outside expert to help in your cash flow planning processes can help to minimize the risk of these problems.

Interested in Learning More?

Maner Costerisan is here to help. Our telecommunication expert team dedicates its efforts to understanding the industry and the “unique” accounting that comes with it. We can help you with your cash flow planning and challenges. Contact Zack Skrzyniarz, CPA or Christy Sommers, CPA today to learn more.