CHASE - CREDITCARDS

How To Analyze Your Cash Flow Projections

Once you have generated your cash flow projections, you can use them in your business analysis.

Consider these eight points:  

1. How much cash will be needed? How much cash will you need during those months when you have projected a cash flow shortage?
2. When will the cash be needed? Based on the timing of the cash shortfalls in your projections, you can plan for monthly deficits.
3. How will the cash be obtained from the business? Cash is ultimately generated from sales revenues, but not all sales are cash sales. If you offer credit terms to your customers, you must determine when those sales will convert to cash. An allowance must also be made for bad debt, as a usually small percentage of accounts receivable are not collected.
4. Where is cash flowing out unnecessarily?  To identify areas where you are losing cash, you can analyze the age of receivables and inventory, the turnover rate of your receivables and inventory, and the concentration of inventory by product line.
5. What is the Inventory Turnover Ratio?  Determine whether you have the correct level of inventory.  Carrying too much inventory can tie up cash and you may risk carrying obsolete inventory. With inventory levels that are too low, you may lose sales and miss the cost advantages of buying in quantity.

 

Calculate your Inventory Turnover Ratio like this: Inventory / Cost of Goods Sold x 365 = Number of days it takes to turnover (liquidate) inventory Discuss these results with your accountant.

 

6.  Should we offer credit?  When you extend credit to your customers, you are making a loan. You are also delaying and putting some of your cash flow at risk. Develop a standard credit application form. Establish and enforce credit policies. Before granting credit, get credit references from your customers. Collecting money can be time consuming and costly.
7. How can accounts receivable be managed? If your receivables get out of control, you can sell yourself out of business. Here are some helpful tips:
• Create a receivables aging schedule
• Calculate your collection period and ensure that it is in line with industry standards
• Identify slow-paying and delinquent accounts
• Take consistent action on delinquent accounts 

8. What are the sources of new cash inflows? There are four basic sources of cash:

   • Operating revenues
   • Sale of property or other fixed assets
   • Owner’s investment 
   • Debt (lender's money) 

    

   This information should be helpful to your business analysis.
    

 

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