When preparing your cash flow statement, you need to ensure that your sales and expenses are carefully balanced. It is often a good idea to create a daily or weekly cash flow projection. You may also consider changing around the month’s beginning and end dates so that the cash coming in during a particular time period is enough to compensate the cash that needs to go out during that period. There are various kinds of spreadsheet software that can help you undertake detailed cash flow analyses.
It may seem obvious that when you increase sales, your cash flow increases – but that’s not always the case. If you’re offering credit, sales may be based on credit transactions, which means that the result of increased sales will be increased accounts receivable and not incoming cash flow. And while sales expenses are incurred before the actual cash comes in, receivables are collected on an average 30 days after the transaction has occurred. The cost of depleted inventory which has gone into making those additional sales needs to be compensated; therefore your cash reserves may actually reduce. Make sure all the financial data is accurately tabulated and all necessary calculations are done bearing in mind any unforeseeable circumstances that may arise.
Make sure that you also keep in mind the tax obligations you have and compensate for them adequately in your statements and projections. You can use the excess cash volumes to make sure that you meet your income and payroll tax obligations.
It can sometimes be necessary to take out a short- or long-term loan in order to balance your cash flow. Short-term loans include equities or revolving credit lines, and come at a risk: if your business experiences inadequacies, the bank may cancel the credit line at any time. Long-term loans require you to pay back the loan amount in the form of monthly instalments which include the principle amount and interest. If you’ve taken out a long-term loan and you’re experiencing a peak or boom in sales, it’s probably a good idea to invest in short-term, interest-bearing low-risk schemes.