9 Reasons Your Business Needs a Cash Flow Plan

/ / Business and Finance, Startups
cash flow plan

Having a cash flow plan is integral for all kinds of businesses, whether they’re just starting out or have been operational for years and decades.

The reason is there are many benefits to cash flow planning. Chief among those are being able to track your company’s incoming and outgoing expenses and plan your cash flow strategy.

But not all companies are familiar with cash flow plans. In fact, many businesses fail in the first 5 years because they don’t have such a plan or know how to create one.

In this article, we’re going to explain what a cash flow plan is along with the top 9 reasons to use one for your business.

What is a cash flow plan?

It’s a plan prepared by you as a company or by a financial advisor to help you estimate and track your incoming and outgoing cash.

By tracking where the money is coming from and where it’s going, a company can decide what to do with its money, estimate when it can turn a profit, and how it can use this money.

The process is called cash flow planning.

It’s worth noting that operating, investing, and financing activities are all included within the cash flow plan.

Who uses a cash flow plan?

The cash flow plan is of interest to several stakeholders, some within the company itself and some outside it.

These stakeholders include:

  1. Accounting personnel, who need to know if the company can cover its current expenses, pay its debt (if applicable), and cover its payroll.
  2. Banks, who may act as lenders or creditors for a potential loan or other financial needs.
  3. Potential investors, if the company is looking to get an investment or a funding round.
  4. Potential contractors, who may be looking to create a business relationship with the company or whom the company is looking to outsource work to. Contractors use the cash flow statement or plan to determine if the company will be able to compensate them for their services.
  5. The company’s top management and shareholders.

Now that you know what a cash flow plan is and who would want to use it and what for, let’s look at why you need one.

cash flow plan quote by Sir Richard Branson

Reasons your company needs a cash flow plan

Having a cash flow plan can help new and operational businesses in a variety of ways.

In fact, many companies and startups that don’t perform cash flow planning end up failing before they’re able to generate revenues and profits.

This means that having a sound plan can help new and small companies as well as large and established ones.

Here are 9 ways companies can make use of a cash flow plan.

A cash flow plan:

  1. Offers a detailed plan of expenses and where your company is spending its money. When this data is analyzed month after month, you can then decide what your essential expenses are and what can be omitted or considered extra.
  2. Offers a detailed forecast of your incoming cash and where it’s coming from. This is particularly important for companies that have multiple revenue streams. The cash flow plan will show you how much you’re making from each income stream.
  3. Helps your business compare your actual spending to your financial forecast and see if your forecasts were estimated correctly or not.
  4. Reduces guesswork when it comes to your company’s finances.
  5. Helps businesses see the effect of their spending. If your company spends $10,000 on advertising but you’re not getting results, your cash flow plan will show you that’s something is wrong with this process, which you may have to suspend until this issue is resolved.
  6. Shows you the peaks and lows of your company’s cash flow during a fiscal year or any predetermined time frame. For example, companies that rely on seasonal revenues like air conditioning businesses, or those that sell ice cream. Agricultural businesses often fall in this category because fruits and vegetables are seasonal, resulting in seasonal cash flow.
  7. Helps you understand how your receivables from sales, credit terms, and your deals with suppliers are affecting your working capital. 
  8. Reveals potential spending problems or funding gaps, allowing you to prioritize and plan your upcoming larger expenses such as repaying a company loan or paying a major supplier.
  9. Keeps you aware of your business burn rate, which is the rate where a new company or startup is spending its raised funds or venture capital before it begins generating a positive cash flow from its operations.
    The business burn rate, also known as startup burn rate, measures a company’s negative cash flow and is quoted as cash spent per month.

Egyptian pounds and money

By using a cash flow plan, you can keep an eye on your business burn rate, plan ahead, and meet your monthly financial obligations.
If a company has a burn rate of EGP 1 million, this means it’s spending EGP 1 million per month.

Conclusion

As you can see, there are many benefits to having a cash flow plan.

It helps you estimate and understand the flow of your finances and helps you make sound financial decisions, which in turn mean your startup can remain operational and avoid pitfalls and overspending.

By understanding the importance of creating a cash flow plan, a business can not only survive the initial phase but it can move on to generating revenues and subsequently profits.

By using cash flow planning, startups can estimate what they need when they first launch their product and what they’d need afterwards. They can decide what they can do internally and what they would need to outsource and so on.

The process of creating a cash flow plan can be a bit of a tedious one. Not to mention, it requires someone with a financial background that can ask the right questions and create a plan accordingly.

A financial advisor, like Stride, can help you create a cash flow plan to support your business, its needs, and its future.

Get in touch today!