Managing Cash Flow

266 Planning Cash Flow
In addition to this month-by-month look at the next year and a quarter, it
will normally be necessary to take a more immediate look at exactly what bills
must be paid within the next week or two and how much cash will be available to
meet those obligations. That will require the company to have information about
what can be expected in cash receipts for the one- or two-week period and what
expenditures need to be made in that same period. Widely accepted accounting
software packages provide detailed information about cash requirements with
time period breakdowns relevant to the business. This kind of information,
together with anticipated receipts from accounts receivable or other sources, provides
all that is needed to evaluate cash availability for the immediate future.
Cash planning is a necessary exercise, but will prove to be an act of futility
if the results are not put to use in some relevant and appropriate way. The objectives
of any cash flow plans should be to:
• Attempt to smooth out cash flow. Cash flow typically fluctuates significantly
from period to period. Looking into the future to see where problems are
coming up also provides the opportunity to take action to do something
about those potential problems. Receipts can perhaps be accelerated or
selected disbursements deferred in order to smooth out shortfalls and
avoid borrowing money or delaying payments to important vendors or
suppliers. Knowing about prospective cash excesses will allow the company
to use them effectively—either for investment or as a reserve for
future requirements.
• Make investments as early as possible. Idle cash is a lazy asset, and the opportunity
to put cash to work for the company in an interest-bearing account
will help to improve overall return to the company. The look into the
future provided by a solid cash planning system may alert the company
to opportunities to make investments earlier than would otherwise be the
case. Larger dollar investments can generate more earnings than equivalent
amounts in smaller pieces, and knowing that cash will continue to be
generated in increasing amounts in the future may allow investment of
more dollars earlier. This kind of anticipatory action is not feasible without
good cash planning in place.
• Delay borrowing as long as possible. The cash flow plan will show prospective
shortfalls for which borrowing may have to be incurred. However, the
plan may also show ways to cover the shortfalls by means other than borrowing,
or may enable the company to defer borrowing until a later time.
This means savings in interest expense, the benefit of which is obvious to
everyone—except, perhaps, the company’s banker.
• Get early information. The advantage of having early information so as to
preclude the chaos of dealing with unexpected cash excesses or shortfalls
should be obvious to any businessperson who has had to put out a fire or
otherwise deal with an emergency. A problem anticipated is a problem at
least half solved, and planning is anticipating.