Eight Reasons Why a Cash-Flow Analysis Shouldn’t Be In Your Head

Posted by Rock LaManna

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Hey, I was a small business owner at one time.  Back in the day, before I attended (and graduated) from the school of hard knocks, I carried my cash-flow analysis in the same place as many other business owners:  In my head.  Big mistake.

A cash flow analysis shows your accounts receivable, your accounts payable, and your cash on-hand.  It allows you to also project balances – quarterly, annually, even three years down the road.  It’s a critical tool for managing your business.

Yes, you can run a successful business by doing this in your head.  But you’ll never be as successful.  Here’s why using a cash-flow analysis is better:

1. It’s more accurate.  Without question, you can’t possibly keep in mind all the little items that you’ll need to pay at the end of the month – the items that truly can add up to some huge numbers in your accounts payable.  


2. It makes forecasting easier.  When you can put in accurate numbers, you’ll get accurate numbers for your predictions.  Understanding exactly what kind of cash you’ll have allows you to predict when you’ll be able to make big asset purchases, timing it well with seasonality or other factors.

3. It makes incentive programs an option.  With the ability to forecast accurately, you can also create incentive programs designed to boost specific profit centers.

4. It makes the bank happy.  Try and tell your banker that the cash-flow analysis is “all in your head.”  It won’t be pretty.  But show your banker your cash-flow analysis, and most importantly – show him that it’s honest and accurate - and he’ll probably be much more agreeable to future loans.

5. It provides your people with security.  Believe it or not, knowing the true story – even if it’s bad – works best with employees.  It shows them you’re honest, and will inspire to reach the specific goals the company has set.

6. It gives you confidence to make a decision.  Who likes making decisions based on fuzzy data?  Don’t.  Make life easier on yourself, and go with the black and white calls.  You’ll sleep better at night.

7. It gives your team a chance if you get hit by a bus.  I hate to be morbid, but life can change on a dime.  Can your team carry on if you’re not there?

8. It builds confidence in your staff.  When you have proof that your management is effective, your team will believe in you.  Incorporate some incentives based on those financials, and they’ll follow you through a wall.

A cash-flow analysis is critical to your company’s success, and it’s the first thing we put together when plotting long-term strategy.  Keep it all in your head, and you hold your company back from being all it can be.

Photo by: Fiyah Dawta


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