Cash flow is a financial tool to understand how money flows in and out of a company. Effective cash flow management plays a crucial role in the sustenance of a company organization. It reflects the liquidity available in the business for payment associated with expenses. The point to remember here is which you can not pay for things if you don’t have cash in hands. Let’s take a look at how to successfully prepare a cash flow projection:
1 . The first step within the preparation of the projection starts with the correct recording of the sources and uses of funds. Remember, we have been not talking about just income and expenses here! The cash flow declaration should reflect all inflow of funds and all outflows of money.
There may be some sources and utilizes which are known or regular, i. e. they are predictable and known in advance. Other sources and uses may be irregular, i. e. either the total amount may be uncertain or their deadline may not be known in advance. It is theses irregular sources and uses which make managing cash a challenge.
2 . The second step starts with the preparation of the actual projection by adding cash accessible at the beginning of the period with other cash to be received from various sources. Here, you will be gathering information from sales people, service representatives, collections and your finance department. In all cases, you’ll be wondering the same question: How much cash in the form of client payments, interest earnings, service fees, partial collections of bad debts, and other sources are we going to get involved, and when?
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Once you complete this step you will have record of all upcoming cash receipts ready.
3. A crucial step in the preparation of the cash flow projection can be in-depth knowledge of amounts, dates and nature of upcoming cash outlays. Include a separate line item inside your projection for every significant outflow which includes rent, cash purchases of stock, salaries and wages, taxes withheld or payable, equipment purchased to get cash, professional fees, utility bills, office supplies, interest payments, loan payments payable, advertising, vehicle and products maintenance, Fuel, creditors’ payments because of and any other material cash outflow.