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Cash Flow Planning: A Good Reminder During These Uncertain Times

January 06, 2012

Christopher P. Hines, CPA

Many people solely consider profit when measuring the success of their business.  The trouble is that profits do not necessarily coincide with their associated cash flows.

The fact is, most failed businesses fail as a result of lack of cash flow.  During these uncertain economic times, cash flow planning is an important exercise when running your business, regardless of the size of your operation.  Trying to manage your business without a cash flow plan in today’s environment is like traveling to a new location without a map or a GPS device.

Cash flow planning should be an ongoing effort and adjusted as circumstances change within a business.  Typically, this exercise is done so that business owners are able to forecast three to nine months into the future to gauge cash availability.  This process combines current financial information and historical patterns with prospective data to forecast expected cash flows.

Cash planning is important for many reasons, the most important being that it provides the business owner with a roadmap to run the business over upcoming months.  However, cash planning is critical to evaluate cash needs for the following circumstances and situations:

  • Funding growth during times of increasing volume;
  • Purchasing equipment, real estate or other capital items;
  • Repaying debt or other long-term obligations;
  • Satisfying bank/investor/bonding requirements;
  • Prepaying vendors to take advantage of trade discounts;
  • Investing in a new product line or research and development initiative;
  • Helping to fund an acquisition or make a key strategic hire;
  • Paying bonuses and/or making annual profit sharing/401(k) contributions, and;
  • Assisting in the year-end tax planning process.

There are many important steps in developing an accurate cash flow planning tool. 
Here are some general guidelines:

  • Understand the direction the business is heading and what the key economic indicators are saying;
  • Identify the target audience (bank/Board of Directors, etc.);
  • Close the month end in a timely fashion (three to five business days);
  • Use realistic assumptions (past financials, market research and industry experience);
  • Benchmark your business’ key metrics against “best of class” companies;
  • Reduce inventory levels and maintain tight controls around work in progress   (measure trends and set goals to improve);
  • Establish good billing/collections procedures – invoice promptly and useproactive collections techniques;
  • Work with vendors/suppliers to extend credit terms;
  • Establish target cash cushions based on historical trends or levels established by management and/or the Board of Directors (e.g., the number of months of operating expenses, the percentage of equity or sales), and;
  • Don’t run the business based on saving tax dollars – sometimes paying “Uncle Sam” today provides for greater liquidity during periods when it is needed most.

A cash flow plan should be formalized in writing and updated continually.  The format should be flexible enough so that it is easy to use, simple enough to modify and not overly cumbersome to update.  Many software programs are able to produce cash flow reports that are part of the monthly financials.  

Once the plan is completed, this item should be distributed to the key decision-makers. Having this tool available in a timely manner will allow business owners to use this information to make proactive business decisions before it is too late

Christopher Hines, CPA, is a partner at BlumShapiro,the largest regional accounting, tax and business consulting firm based in New England, with offices in West Hartford and Shelton, CT and Boston and Rockland, MA.  The firm serves as business advisors for today’s leading companies, non-profit organizations and government entities, working to strategically tailor and consistently deliver tested solutions for unlocking an organization’s full potential.  For more information about BlumShapiro, visit


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