Cash flow is arguably the most important element in the smooth and successful operation of any business.
Generating sales and managing expenses are, of course, also important. But ensuring that cash from those sales is collected and that your company can pay its employees and bills is even more critical. Why? Because even the most loyal staff won’t stick around without a paycheck. And without certain essential elements — power, facilities, materials, equipment — the business simply can’t operate.
This is particularly true when the economy goes into a slump or experiences other odd fluctuations. Your company’s resources can suddenly be stretched thin. Indeed, you might find yourself scrambling to keep up with accounts payable, let alone worrying about accounts receivable.
Bottom line: proper planning is paramount to preventing a serious cash crunch.
A good initial step is to diagnose your company’s financial health and test for weaknesses that could create problems down the line.To that end, here’s a checklist you can use to administer a cash-flow checkup:
| Financial Health Checklist | YES | NO |
| Turnaround time is within our historical norms. | ||
| Bills are generated immediately. | ||
| Bills are accurate, complete and understandable. | ||
| We finance equipment without taking cash from operations. | ||
| Prices compensate for time spent on jobs and associated risks. | ||
| Work is consistently completed efficiently and on time. | ||
| Budgets are detailed and closely monitored. | ||
| We determine the financial viability of outsourced work before outsourcing it. | ||
| We adequately control employee overtime. | ||
| We negotiate the best price and terms for materials and supplies. | ||
| We forecast monthly cash flow and make financial adjustments as necessary. | ||
| Our banker is aware of our business and financial needs. | ||
| Staff compensation is linked to productivity and profits. | ||
| Standard operating procedures are written and uniformly followed. | ||
| Labor, technology and equipment productivity are measured. We use the data in decision-making. | ||
| Our bidding process for new work is accurate. | ||
| Our accounting and technology systems provide the data we need to make timely and effective decisions. |
If you answered “no” to any of the above questions, you might have just diagnosed an adverse cash-flow condition of your company. If so, let the healing begin. Your CPA can help you develop a treatment plan for alleviating the issue before it becomes a major illness.