As discussed in a previous article, maximizing net cash inflow is a significant goal of financial planning. Managing cash flow is key to optimally allocating financial resources, identifying & preparing for lean periods, and making best use of excess funds.
More specifically, cash flow management has numerous benefits, not limited to:
- Securing debt before it’s needed (you’re nodding your head here)
- Controlling excess cash
- Minimizing or avoiding sales of illiquid asset to raise funds for one-off costs
- Identifying areas of excess or unnecessary spending
- Recognizing relationships between various financial activities
- Identifying when it makes sense to expand or contract activities
- Determining if a proposed venture is financially viable (you’re hanging your head here)
Numerous tools and practices are available to properly manage cash flow. These include obtaining and managing various types of debt, quantifying your minimum cash reserve, developing and implementing ways to increase and accelerate cash inflows, developing and implementing ways to decrease and slow cash outflows, tweaking or entirely revising business and/or pricing models, and so on.
The best way to get started is to implement another tool that is both simple and powerful: a cash flow model/projection. What does a cash flow model/projection entail? On a month-by-month basis for a specific period:
- Project the amount and timing of cash inflow from business sales, wages, investment activities, loans, etc.
- Project the amount and timing of cash outflows such as business expenses, household expenses, investment activities, loan repayments, one-time asset purchases, etc.
- Compare the timing of in and outflows to identify periods of expected cash excess and cash deficiencies. Develop a plan to address these periods before they occur.
- Compare estimates to actual to improve future projections.
It’s often said that the best way to predict the future is to create it. If projecting cash flows isn’t something that’s already on your monthly to-do list, you’ll be amazed at the insight this simple activity provides. It basically converts you from being a bystander to becoming the creator of your financial life.
If you have any questions regarding cash flow management for your business or household, I would love to hear from you and see how I can help.