Avoiding A Cash Flow Disaster

How To Detect Cash Flow Problems And Save Money

All businesses must manage their cash flow.  Many small businesses just watch their checking account balances and assume that is sufficient.  Outstanding checks are ignored in this case and that can have disastrous results.  Some businesses will keep their check ledger balance, which is better, but that still doesn’t take all factors into account that will result in sound cash management.  Some businesses also neglect to monitor cash flow indicators and view regular cash flow reports.  So most small businesses manage their cash flow by the seat of their pants and leave themselves open to unnecessary financial risks also tying up cash that could be utilized for something else.

Identified a serious cash flow threat saving the company over $10k through early detection by establishing sound accounting policies and procedures for the company

I adopted a cash flow reporting procedure that involved weekly cash flow reports.  These reports would not only include the daily cash balances for the week in all company bank accounts, but also included cash projections based on the Average Collection Period (ACP) of our receivables, and the Average Days Outstanding (ADO) of our payables, particularly our payments to critical independent contractors.  This could vary significantly due to the type of terms in agreements with our independent contractors.  These reports would paint a picture of where cash was coming from and where it was going.  It would also allow me to have a comfort level that there would be sufficient cash to pay the projected payables coming due over the following week.  I would also see if a problem was emerging by seeing a change in the trends.  This happened when a manager took it upon herself to take advantage of an exception in policy regarding payable terms with our independent contractors and started granting more generous terms than was authorized.  As a result, about two weeks into the changes in contracting terms, the cash flow report began showing excessive cash out.  This is a trend that, if continued, could have overdrawn the checking account in about 4 weeks.  Immediately acting on this finding avoided the consequences of over $200,000 of bounced checks.  The overdraft fees, administrative costs, and loss of business would have easily totaled over $10k.

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2013 Jim Anderson

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