Management Planning for Optimal Cash Flow
Management planning is the path to achieve goals and be one step closer to success and optimizing cash flow
Editor’s note: This is part three of a three part series. Part one: Cash Flow Management for Small Business Owners and Part two: What Are Small Business GAAP Financial Statements & Management Reports?
As mentioned at the start of this series, the goal of any business is to be successful. Following this, we covered the necessary steps to establish a strong foundation so that we can achieve this goal. However, to make use of that work, we need proper guidance and analysis to drive success. In this final part, we will discuss how to effectively leverage the work done throughout the month to set your business on the path to success through strategic management planning.
The Key Questions
In this series, we often highlighted two key questions which are “How did we perform this month?” and “How did we perform year to date?”. They have been consistently brought up because when management answers these questions, they have a basis for analyzing the company’s performance in the short and long term. With this, they can put performance on a timeline, compare it, and make decisions to drive growth.
For example, many companies must face the extra challenges brought up by the seasonality of their product or service. However, by understanding this concept as it applies to their business through short and long-term trends, management can account for these fluctuations. This knowledge becomes invaluable because it will prevent management from making decisions by associating the rise and fall of sales to a wrong cause which will likely lead to counteractive planning.
These two questions have become increasingly important in today’s world, and they provide the basis for most planning, but there is more for management to consider than this alone.
Internal & External Analysis
The key questions address company performance; however, it is important to expand past that scope. Management needs to not only understand how the company is performing, but what is driving this performance. They need to gain an understanding of their strengths and weaknesses to address them appropriately. On top of this, it is just as important for them to position themselves in between their competitors and see where they fit in the market.
By taking this step and understanding how the company bodes internally and externally, management can create a comprehensive strategy that not only evaluates where the company stands, but also identify opportunities for growth and areas for improvement.
Financial Planning
To supplement the above planning and analysis is financial planning, because ultimately, what is best for the business might not be financially feasible. However, with effective financial planning, management can set goals and develop a strategy to achieve them and properly develop the business.
Additionally, despite the success of every other form of planning, it is important to have cash-flow based financial planning. Without it, even a thriving business can face issues such as not being able to pay debts on time if the money from sales has not come in. This is a common issue that many small businesses face, however, there are a variety of ways that management can choose between to optimize cash flows.
A great starting place for these decisions to be made is to refer to previously generated management reports such as the cash flow forecasts to gain visibility of how cash is moving in the company. Through an analysis of this report, management will not only be able to see how money is moving throughout the company but find areas for improvement as well as plan accordingly for the future to continue cash flow optimization despite potential difficulties.
Real World Examples
- A client in a competitive industry is currently at a break-even point. It is difficult to grow organically and so they are looking to acquire another firm to facilitate growth. However, to do so, they must first look at their financial statements and management reports to allow for effective management planning. This information will allow them to make an appropriate offer for this acquisition as well as set up installment payments to finance it.
- A client needs more office space to facilitate future operational growth. As part of their management planning, they must consider how this will impact their gross profit margin. Through securing a larger office, they will ultimately be able to increase their profitability. However, they will also need to carefully budget as they finance this expansion with the requisite management plan.
Conclusion
The work covered throughout this three-part series can be used as a blueprint for businesses. Starting with the month-end close and the resulting GAAP financial statements, we lay the foundation. Building on this with management reports, management must address the two key questions while analyzing the company internally as well as within the market. This approach will allow for strategic decision making and planning that not only leverages company strengths, but tackle challenges. As a result, the business will find itself on the path towards its goals and be one step closer to success and optimizing cash flow.
Frederick Schildwachter contributed to this Alex Hart article.
Related content:
Part 1: Cash Flow Management for Small Business Owners
Part 2: What Are Small Business GAAP Financial Statements & Management Reports?
