Cash planning for a small business is a critical component. Cash is king, but it takes time to build wealth. Why? Because most of your profits (if you make any at all) are realized after the first year, and then after several consecutive years of very slow or stagnant sales. The only way to build long term wealth for your business is to reinvest your profits in expansion projects and product lines.
So, what is cash planning? Cash is used for day-to-day business expenses such as rent, utilities, payroll, sales tax, purchases, equipment and supplies, inventory, machinery and inventory reduction. Cash is used for short-term business projects (such as inventory replenishment) as well as long-term business investments such as inventory buy-sell agreements, capital financing, partnership interests, acquisitions and mergers. As you can see, cash management involves the proper allocation of cash flow so that it provides for the long-term assets and liabilities of your business. A well administered cash plan is necessary for any business that expects to be profitable.
How do I begin my cash management activities? The best way to start is by categorizing expenses and categorizing income. This will allow you to know what is required for the business every month. Start with a general budget, and then adjust it for your unique business. Be sure to keep accurate records of income and expenses.
Is there a relationship between what is cash planning and budgeting? The two concepts are closely related because both involve the proper allocation and expenditure of cash resources for business growth. Proper cash management, therefore, depends on both knowing what is going out, and understanding what is coming in.
What is cash planning used for in today’s economy? Today’s economy is suffering as many businesses struggle to survive. Many have gone out of business in the past couple of years. As a result, there has been an increase in bankruptcy filings and foreclosures. This, along with slower sales, is resulting in fewer customers and clients. Cash planning can help your business survive these difficult times and continue operating.
There are many advantages to a well designed cash plan. Your cash management allows you to keep control of your business at all times. When you are prepared, your business will run efficiently because you will have adequate cash assets to meet all of your short-term and long-term expenses. Proper cash management allows you to make smart decisions on your investment and marketing projects. It also allows you to be flexible enough to meet customer orders and quickly respond to any market fluctuations.
As we have said, a cash plan is essential for any business that expects to succeed. If you currently have a business, you need to begin developing a cash plan even if your business is still in operation. Every small business should have a well developed cash plan in place in order to remain competitive.
In order to make sure that you are meeting all of your cash management needs, you must always have the right amount of cash available to support all of your operations. In other words, you cannot simply put a deposit in the bank and hope to have all of your expenses covered. You need to determine what your budget will be in order to have the cash you need. For most businesses, the best way to accomplish this is by calculating your income and expenses each month before making any financial decisions. We hope that this article has provided you with an explanation as to what is cash planning is and how it can assist you with your cash needs.