Back September 8, 2016

How to Organize Your Cash Flow Plan

Updated on 19 October 2020

Cash flow represents the actual money being transferred in and out of your business. Therefore a cash flow plan will give you an overview of all your revenues, expenses, and the net result over a specific period of time.

Why is cash flow so important for your business? Because it reflects the available cash in hand or the (most liquid) resources you can rely on for your current activity.

A cash flow plan will reflect the healthiness of your company – whether it can survive from day-to-day operations or it rather relies on external investment (e.g. credit). Also, a properly maintained cash flow plan will give you answers to some important questions like Can I bring another person on board now?, Will I have enough money to pay for all salaries at the end of the month? or Is it possible to have cash shortages in the near future?.

In order to be up to date with your company’s financial status, we encourage you to start analyzing and planning your cash flow asap. You can easily do this in ThinkOut, our cash flow management platform. Automatically import your daily (banking) transactions and with a couple of clicks, you’re able to answer some of the financial questions that have always bothered you.

No matter the solution you choose, here are some guidelines to take into consideration when organizing your cash flow plan. Nothing too complicated, we promise.

The first thing you may want to do after collecting all your data is to organize your transactions based on inflow and outflow categories. By doing this you will be aware of your top biggest monthly spendings and your most important projects or clients. Create other subordinate categories based on the level of granularity you are looking for – the more detailed your cash flow plan, the easier for you to spot potential problems. 

Inflows

Think about your company’s revenue streams. Do you sell services, products, or both? Then create separate categories and see which one is contributing the most to your total revenue. Also, if you have multiple services or products, add as many subordinate categories you need to be comfortable with the information you collect.

Another way of organizing your inflows is to categorize them based on the client’s name. This is especially useful for project-based businesses and it will help you have a clear status of payments per each project you work on. In the long term, you will also see who pays in due time, who needs to pay faster, or with whom you may need to renegotiate contracts.

Outflows

You cat start categorizing your outflows by adding types of fixed and variable costs. A cash flow plan organized based on fixed and variable costs will help you to easily identify and cut on expenses that are not essential for your daily operations.

Another way of organizing your outflows is to simply add categories such as Cost of Goods Sold (COGS), Operational costs, Marketing costs, or even more detailed, Salaries, Office, Suppliers, Transport, Marketing, Taxes. For the Office category you can even create other subordinated categories such as Rent, Maintenance, Office supplies, Cleaning services, etc.) and the same you can do for Salaries or Suppliers. 

If you work with a wide range of suppliers, it will be helpful for you to organize your spendings related to them based on the name and the category of products/services provided. Following this principle, you will be able to see what are the main costs incurred by selling your products. Also, depending on the volume of orders you make and other contractual provisions, you can spot the supplier you can renegotiate some terms with.

Based on your business profile, inflows and outflows may also be classified based on projects. For example, if you operate a business in the construction industry, it’s possible that you will find it easier to see your money movements based on specific sites. 

Please keep in mind that these categorization methods mentioned above can be used together as well as separate. Hence, you can organize your cash flow plan starting with the project name, then on cost type (fixed / variable), on a specific category (e.g. Salaries), and ultimately on a very specific subordinate category such as Accountant salary.

Alternatively, you can also structure your cash plan based on cash flow activities (operating, investing, financing). We covered this topic more extensively in one of our previous articles.

Once you’re done with organizing your data it’s time for analysis. Take a look at your past money movements:

  • Do you spot any activity patterns over time? Then you should prepare for the next rainy or sunny days.
  • Do you register very different monthly fluctuations? Check out the categories and identify the source of these changes, maybe it’s time to cancel some subscriptions.
  • Did you identify a period of time with high net results? Investigate more, remember what caused it, and try to replicate the same situation if possible.

After you understand what is the current financial status of your company you can start planning. Design the future image of your company by adding cash flow forecasts. The easiest thing for you will be to add the fixed costs because these are due on a monthly basis no matter the sales volume.

How much can you survive with the money available today? What if you also add some variable costs? What if you add some receivables too?

Financial forecasts are some assumptions you have regarding the future of your company. It will help you identify future cash flow problems and it will reduce the amount of stress given by the ever-present question Will I have enough money to pay for everything this month?. If you need to get rid of this burden, we encourage you to read more about how to build financial forecasts for your business.

We know, cash flow analysis and forecasting are not the most delightful activities for all managers, but ThinkOut makes it easier to handle. Just a couple of clicks and you get access to your company’s financial overview now and tomorrow. Use it to better understand how money moves your business and what type of decisions are required to stay afloat.

Continue to read about how to take care of your cash flow during difficult times or why are liquidity ratios important for a small business.

Author: ThinkOut