Should Your Business Have a Monthly Cash Flow Plan?
Did you know having a monthly cash flow plan can help you avoid the number one reason businesses fail?
When a business fails, there’s an over 80% chance it’s due to cash flow issues.
Even a profitable business can run out of luck if its cash flow isn’t managed properly.
And that’s where a monthly cash flow plan can come in to save the day.
What is a Monthly Cash Flow Plan & Why Do You Need One?
Cash flow is the movement of money in and out of your business.
It's important to understand that cash flow is different from profit. Profit is what's left over after you subtract your expenses from your revenue – it's a measure of your business's overall financial performance.
Cash flow, on the other hand, is the actual money you have in your bank account to pay bills, invest in growth, and handle unexpected expenses.
Benefits of A Monthly Cash Flow Plan
Here's why a monthly cash flow plan is important for your business:
Improved Financial Visibility: A cash flow plan gives you a clear view of your income and expenses, helping you identify potential problems like a cash shortage before they escalate into major issues.
Better Decision-Making: With a cash flow plan, you can make informed decisions about spending, hiring, investments, and more.
Increased Confidence: Knowing where your money is coming from and where it's going can alleviate financial stress and boost your confidence in your business's stability.
Stronger Relationships with Lenders and Investors: A well-prepared cash flow plan demonstrates your financial responsibility and makes you a more attractive borrower or investment prospect.
Tax Time Becomes Easier: A strong understanding of your cash flow means that you’re prepared for taxes throughout the year, instead of a year-end scramble when taxes are due.
Building Your Monthly Cash Flow Plan
Creating a monthly cash flow plan doesn't have to be complicated. Let’s get started!
Key Components of a Monthly Cash Flow Plan
Your plan should include all sources of income, including:
Sales
Accounts receivable
Loans
Investment income
Your plan also needs to include all expenses, such as:
Rent
Payroll
Utilities
Inventory
Taxes
The Cash Flow Plan Process:
Begin with a template: Use a spreadsheet or take advantage of existing templates. Check if your accounting software already includes a cash flow plan template or setting.
Gather your data: Collect information on all your income and expense sources.
Create projections: Estimate your future cash inflows and outflows based on historical data, trends, and upcoming events.
Be realistic: It's better to be conservative in your projections than to overestimate your income and underestimate your expenses.
Cash Flow Forecast
Financial forecasting is an important part of decision-making.
A key part of your cash flow plan is the cash flow forecast, which involves predicting your future cash inflows and outflows. This helps you anticipate potential cash shortfalls and proactively address them. We’ve created a guide and free template for putting together a cash flow forecast.
Making Your Monthly Cash Flow Plan Work for You
A cash flow plan isn't a "set it and forget it" document. Here's how to make the most of it:
Review and update regularly: Your business is constantly evolving, so your cash flow plan should too. Review it monthly and update it to reflect your current situation and ensure you’re on track with your goals.
Analyze your results: Compare your projected cash flow with your actual results to identify any discrepancies. This will help you refine your forecasting and make necessary adjustments.
Use it to guide your decisions: Your cash flow plan should be a go-to resource when making financial decisions.
Don't be afraid to ask for help: If you find creating or managing your cash flow plan overwhelming, reach out to Accounting Made Accessible. We're here to help you take control of your cash flow and achieve your financial goals in a safe, judgment-free environment.
Cash flow management is important, so don’t forget to read our article with 7 tips to better manage your cash flow!
Common Mistakes to Avoid in Your Cash Flow Plan
It’s important to learn from mistakes, so we’ve put together a list of some of the most common ones we’ve seen when it comes to monthly cash flow planning!
Not creating a plan at all: The biggest mistake is not having a plan to guide your financial decisions. It’s okay if it’s not perfect, but it’s good to start somewhere.
Not tying your cash flow to larger goals: including financial goals and other key performance indicators (KPIs). Your financial documents don’t have much meaning if they’re not informing what matters to your business.
Overestimating income or underestimating expenses: Be realistic and factor in unexpected costs.
Not automating and setting up processes that help with cash flow: such as setting up a clear accounts receivable process. Avoid soul-crushing paperwork wherever possible with automation!
Forgetting to update the plan: Your plan should be a living document that reflects your current financial situation. Ensure it’s part of your monthly financial reporting.
Help with Your Monthly Cash Flow Plan
A monthly cash flow plan is a powerful tool that can help you navigate the financial landscape of your business. By understanding your cash flow, you can make informed decisions, reduce financial stress, and set your business up for long-term success.
But you don’t need to do it alone!
Accounting Made Accessible specializes in helping businesses manage their cash flow and finances.
Book a free strategy call and let us help you master your cash flow in a pain-free way that gets the results your business needs to thrive!