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Poor cash management, including relying on bank statements to determine a company's financial position, can lead to doom.
Cash Flow

How Managing Your Business Cash Flow from Your Bank Account Can Lead to Doom

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Back to all posts
How Managing Your Business Cash Flow from Your Bank Account Can Lead to Doom
Cash Flow

How Managing Your Business Cash Flow from Your Bank Account Can Lead to Doom

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Back to all posts
How Managing Your Business Cash Flow from Your Bank Account Can Lead to Doom
Cash Flow

How Managing Your Business Cash Flow from Your Bank Account Can Lead to Doom

Cash flow is the lifeblood of any business—big or small.

Every company needs a steady source of income and cash flows to pay bills and manage daily operations without a hitch. Unfortunately, many business owners adopt poor cash flow management practices that steer the business down a path to failure.

In fact, cash flow problems have been identified as one of the top reasons why businesses fail. Poor cash management, including relying on bank statements to determine a company's financial position, can lead to doom.

But why is managing cash flow from your bank account a bad idea?

While bank statements are helpful when reconciling accrual-based book cash balances, they are a record of historical transactions up to a given date. They don't reflect a company's actual cash balance due to timing differences, nor do they allow for cash forecasting.

For these reasons, bank account balances can be misleading, thus, not the best way to manage your cash flows. In this guide, we'll delve deeper into why managing cash flow from bank account is not recommended, and how cash forecasting is critical for any business to solve the problem.

Why Bank Statements Should Never Be Used to Manage Cash Flow

Bank statements are a great way to show your financial position at a point in time. They tell you where you have been, not where you currently are, and certainly not where you are head.

A bank statement will give you a clear picture of the deposits made, checks drawn, and completed electronic transfers but won't show what checks, deposits or withdrawals are in transit. So, your account balance will help you keep track of your overall business health but leave serious gaps in your week to week cash flow.

Your online bank balance and list of transactions simply doesn't provide you with enough information to gauge your actual bank balance. Even worse, the list of past transactions will not detail payments, such as rent, utilities, and payroll that need to be made in the future.

For example, a bank statement will not show cheques that have been sent to suppliers but not cleared. Before a cheque is cleared and the money deposited into the supplier's (payee) account, your bank account will show "misleading" figures.

Like cheques, unprocessed automated electronic payments that have been scheduled and not processed will have the same effect. Your bank account will display inflated figures only for the balance to drop once all the payments have cleared. Generally, your bank account can give misleading information due to the following:

Unprocessed deposits

• Outstanding checks

• Unpaid invoices

• Bounced checks

• Scheduled electronic payments both in and out of an account

Last but not least, a bank statement offers no forecasting function, and forecasting is what enables management to foresee upcoming cash problems and take the necessary action. For these reasons, it's advisable avoid managing your business cash flow from your bank account. Instead, creating a cash flow forecast is critical for business success.

What Is Cash Flow Forecasting?

Cash flow forecasting is an estimate of a company's financial position in the future. It shows how much money will be coming into the business (expected cash inflow) and going out of the business (expected cash outflow) in the coming days and weeks.

When maintained accurately, cash forecasting enables businesses to predict their future financials. It can help identify potential cash deficits and surpluses, allowing the management to make informed financial decisions.

What's Included in a Cash Flow Forecast?

Cash flow forecasts can be simple or very complex depending on your requirements and the nature of your business financials. However, these 3 constants should be in every cash flow.

• Opening balances

• Cash inflows

• Cash outflows

Opening Balances

Your opening balances should reflect your current financial position. You can then analyze how your forecasts will affect your current financial status. Essentially, your cash starting point, generally viewed as your ‘month start’.

Cash Inflows

What are your expected sources of income?

Add all the cash inflow for the projected period, including sales, investments, grants, interest income, funding, tax refunds, and other sources.

Most important, predict when the cash will be available in your account to pay bills. Thus, the ‘Due Date’ can be very misleading. Unfortunately, late payments are all to frequent. So base your forecasts on ‘expected dates’ based on clients past performance in making payments, conversations with your clients and a conservative estimate on when cash will be accessible.

Cash Outflows

What's your expenditure for the projected period?

This will include all your outflowing cash, such as salaries, rent, inventory and materials, fees, loans, credits, interest, taxes, etc. Add them together to arrive at the total cash outflow figure for the projected period.

Why Cash Flow Forecasting Is Critical for a Healthy Business

With cash forecasting, you'll know when the invoices will be paid and how much money you can expect in the coming weeks. This, in turn, enables you to plan accordingly, taking all the cash inflows into account.

Other advantages of cash forecasting include:

1. Anticipate Cash Shortages

Cash flow forecasting allows you to identify cash gaps before they impact your business, so you can take appropriate action before things get out of hand.

With such insights, you can cut operating costs, hold out on updating your equipment, or suspend expansion plans until you've dealt with the problem. You could even look for alternative financing options if the anticipated cash shortages will affect daily operations.

2. Manage Surplus Cash

Another benefit of cash flow forecasting is that you get to know when you'll have surplus cash and from where.

Forecasts can help identify a potential surplus and allow managers to allocate excess cash appropriately. Knowing when you'll have surplus cash in the bank and where the money will come from can help you better plan what to do with the money.

3. Keep Track of Late Payments

Keeping track of late payers is truly the bane of a business owner's life.

If your cash flows keep falling short each month, it could be due to late payers in your portfolio, which calls for more effective credit control. Cash flow forecasting gives you a clear picture of how much should be coming in if all payments are made on time, so you'll quickly spot any disparities and identify the culprits that need a follow-up.

4. Track Your Spending

Creating a clear picture of your projected cash outflows can help you better track and understand your business expenditures. By seeing the areas where you may be overspending, you'll be able to cut costs and update your company expense policy.

The Bottom Line

When created and used appropriately, cash flow forecasts can be highly valuable for businesses of all sizes. Understanding your company's projected cash flows can help you anticipate cash shortages, better manage surplus, and improve your business's bottom line.


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