Advivo Partner, Chris Morris, discusses when and why business owners should use different types of cash flow tools.
Cash flow is a critical aspect of any business and relates to the movement of cash in and out of that business. Understanding different types of cash flow reports and when to use them can help business owners better manage their finances and make informed decisions about operations.
In this article, we share 5 of what we consider to be the most important cash flow reports that business owners can utilise for their business.
1. Historical cash flow reports.
Historical cash flow reports are based on historical figures and often feature in routine business reporting.
Historical cash flow reports will show the cash that has come into the business and the cash that has left the business over a period (typically one month). This type of report is best used when comparing the actual cash movement (historical) to the expected cash movement (forecast) for the same period.
2. Forecast Cash Flow Reports
Forecast cash flow reports show the expected cash inflows and outflows of a business over a specified period. They will typically include information on projected revenue, expected cash collections from customers, anticipated expenses including salaries, rent, utilities, and other operating costs, as well as projected capital expenditures, such as new equipment or investments in the business.
Cash flow forecast reports can be used to help a business plan for future operations, identify potential cash shortages, and make informed decisions about financing and investments. It is an important tool for managing the financial health of a business and ensuring that it has sufficient cash on hand to meet its obligations and pursue growth opportunities.
The accuracy of any cash flow report depends on its inputs, and a business’ cash cycle can have a large impact on the accuracy of a cash flow report.
The intended use of the report will dictate the level of detail which should go into its preparation.
For small business owners, an overview of their forecast cash flow requirements will often be sufficient to ensure cash requirements are on track. Whilst a simple overview won’t always account for the timing of specific receipts or outlays, it can be used on an ongoing basis to ensure that the business will have enough cash to meet its ongoing requirements.
3. Creating a Very Simple Cash flow forecast
Perhaps the most important type of cash flow report for small business owners builds on their profit and loss to provide a valuable cash forecast.
The concept of breakeven sales relates to the number of sales required to cover all variable and fixed costs for a period, meaning that the net profit will be $0 at that break-even amount of sales.
Cash flow breakeven takes this concept a step further and considers other cash flow requirements of the business which are not reported on the profit and loss.
Check out our “How To Guide to create a Simple Cash flow forecast”.
4. Long Range Cash Flow Model
This is normally a very detailed cash flow report which can take into account the unique cash cycle of a business and can be built with sufficient detail to allow the modelling of scenarios such as business acquisitions and resource requirements for growth. They form an essential part of a three-way forecast which is often used as a growth model for businesses. A three-way forecast shows the forecast position of the three key reports, being your Profit and Loss, Balance Sheet and Cash Flow Reports.
5. Short Range Cash Flow Monitoring
This is key for businesses that are operating with high levels of cash flow uncertainty.
Just as the very simple cash flow forecast works for a period (normally 1 month), short-range cash flow monitoring may need to be conducted on a weekly, or even daily basis to ensure there are sufficient funds to meet the immediate requirements of a business.
Whilst such tight cash situations may not be ideal, practices such as short-range cash flow monitoring can be extremely helpful to navigate such situations.
