“What determines cash on hand is not sales but collections, and history shows that
during inflationary times customers start paying slower as a result of their own cash squeezes.”
by running periodic forecasts. “What I would recommend is looking at your demand side and asking, ‘What are we really going to need here?’ And then looking at your supply side and asking, ‘What will I have to make?’ And then determining what the answers mean for cashflow. If it’s going to be negative, you better borrow some money.”
Such analysis, of course, involves estimates of future revenues—a practice tainted by uncertainty. “Having a sales forecast is great, but that doesn't mean you will collect all the money you think you will,” said Scott Beaver, senior product marketing manager at Oracle NetSuite. “And even if your sales forecast is a hundred percent accurate, will the expected timeframe be met?”
What determines cash on hand is not sales but collections, and history shows that during inflationary times customers start paying slower as a result of their own cash squeezes.
Planning must reflect the reality of cashflow uncertainty. “Growing accounts receivable can put serious strain on smaller businesses that may not have the cash reserves to absorb delays in receipts,” said Beaver. “For most companies cashflow forecasts are less than 75 percent accurate.” One approach to anticipating likely variables is to look at historical performance. What percentage of receivables is usually collected during slower seasons? Tat figure can be applied to open receivables to help estimate the likely pace of receipts.
Faster Receipts
Historic data, of course, may provide a less than reliable foundation for future forecasts. Whatever the estimates for what lies ahead, businesses can obviate cash squeezes
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by accelerating accounts receivable and stretching accounts payable. For the former, experts advise running regular aging reports. How much do customers owe in increments of two weeks, 30 days, and 60 days? Any growth in the numbers of extending payment intervals over time might indicate a steady deterioration of cashflow.
Keeping in close touch with customers can also help accelerate receipts by providing opportunities to request timely payments and helping spot nascent issues that may grow into future roadblocks. “Maintain a good handle on what customers are doing,” said Anderson. “What are their future sales activities? Are they encountering problems that may affect operations?”
Not all customers are of equal importance, and it’s smart to concentrate efforts on the most profitable. Account reviews can identify which customers should receive the most attention. “So much of the important information required to monitor cashflow is tied to a selling cycle which
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