Managing cash flow strain

Published: 29th June 2011
Views: N/A

If companies do any cash planning at all, they typically concentrate on day-to-day cash balances. While this concentration addresses the issue of daily survival, it does not consider the fundamental need to sustain the correct balance among the sources and uses of cash funds on a longer term basis.

The company's sources (increases) of cash come from:

Decreasing assets (other than cash),for instance, collecting accounts receivable, turning inventory to cash, selling off excess property, plants and equipment

Increasing liabilities, for example, adding to accounts payable (less cash needed until the additional bills are actually paid), short-term financing, long-term borrowing

Increasing stockholders' equity, for example, securing extra equity investment, reinvesting profits

The company's uses (decreases) of cash result from:

Increasing assets (other than cash), for example, purchasing inventory, property, plant and equipment; adding to accounts receivable (less cash coming in until the customers pay off their bills)

Decreasing liabilities, for example, paying off accounts payable, borrowings, other liabilities (pension payments, withholding taxes, other taxes)

Decreasing stockholders' equity, for example, paid dividends, repurchasing equity, or incurring losses

Cash flow planning focuses on having future expected sources exceed uses of cash and what needs to be done to maintain that positive flow of cash. Comparing actual results to the cash plan provides a basis for analysis and appropriate decision making. The tools to be considered in the cash flow planning process include:


Toestablish an effective (i.e., usable and reasonably accurate) process for projecting cash flow, it is helpful to examine the company's actual cash flow history. A tedious, but systematic, method is to review in detail 12 months of actual cash flow for the company. For each month all sources of cash receipts and all cash disbursements should be listed by account. This will generate a growing list of receipts and disbursements should be listed by account. This will generate a growing list of receipts and disbursements, some of which will be quite minor


In addition to having the necessary internal systems in place to administer and control its cash balances and transactions, the company must also know in advance what kinds of cash flows to expect. In that way, the company can deal with those cash flows on a prospective rather than totally reactive basis. As in every other business discipline, planning is the difference between careful, considered decisions and potential chaos.


Plans are made for short- or long-term periods of time, but these designations are more specific in definition than they are in actual usage. As a general rule of thumb, short-term plans will cover one business operating cycle of up to one year. Long-term planning, depending on the nature of the business, can be six months, two years, or even as long as 50 years.


Cash flow budgeting is an bodily process that focuses specifically on the company's cash position. A good cash budgeting process is essential for the business to manage its cash flow. Even if the organization does not see fit to do formalized profit and loss budgeting, it should consider cash budgeting. Knowing when and how much excess cash will become available allows the company to make intelligent and informed decisions as to how best to utilize this excess cash. Within reason, there cannot be too much time expended on cash flow planning process.

For more information on Cash Flow Indirect Method or how much cash on hand.

Report this article Ask About This Article

More to Explore