To boost the performance of your business, follow these accounting best practices.
Whether you’re buying, selling, starting, or growing a business, cash flow planning is critical to the success of an integration firm. Businesses with proven techniques and accounting best practices for cash flow planning are more successful and, therefore, more valuable than their competitors.
If you’re buying a business, then make sure these accounting best practices exist. If you’re selling, then identify the areas that need improvement and fix them. In the eyes of a prospective buyer, this will increase the value of your business.
Planning should be done in advance and for at least one year out. The cash flow plan should closely align with the strategic plan for the business. The purpose behind the plan is to:
- Predict when, where, and how cash needs will occur
- Predict the best sources for meeting additional cash needs
- Be prepared to meet these needs when they occur (it helps to keep good relationships with bankers and other creditors)
- Plan business profitability and growth
The starting point for avoiding a cash crisis is managing the balance sheet. Collection of accounts receivable and payments to vendors are two areas that require daily attention. A well-run business will develop short-term (weekly, monthly) cash flow projections to help manage daily cash, as well as long-term (annual and up to five years) cash flow projections to help develop the necessary capital strategy to meet business needs.
Remember, the plan should be by week or by month—not by year. Many integrators make this mistake. Most businesses have cycles and planned and unplanned major expenditures, so you need to see the highs and lows in the business on a weekly or monthly basis.
If you plan properly, then the cash needs will be very apparent on the cash flow projection in a given month. If you know in advance when the cash needs of your business are the highest, then it will trigger actions on the part of the business for capital retention, cost reduction, and bank borrowing availability.
How does a well-run business deal with these ups and downs? By negotiating in advance:
- Vendor payment terms
- Customer payment terms (and prepayments, if warranted by the business)
- Bank lines of credit
- Long-term debt
- Equity capitalization
If the business has not prepared cash flow projections before, then preparing historical cash flow statements and balance sheets will help you gain an understanding about previous cash flow performance and your potential needs in the future.
The process of planning future cash flow is very time consuming. If done correctly, however, it will not only save you money, but also save your business.
Jeff Bronswick is CEO at Bronswick Benjamin, a Chicago-based certified public accountant and NSCA Member Advisory Councilmember.