Cash Flow Planning: Mastering Your Company’s Financial Rhythm

Cash flow is the lifeblood of your business. Without it, operations grind to a halt regardless of how profitable you look on paper. Understanding how money moves through your business gives you the control you need to make strategic decisions and weather challenging periods.

Understanding Your Cash Flow Cycle

Cash flow planning starts with recognizing that your business operates on a cycle. Money comes in from sales, cash goes out to cover expenses, and the timing of these movements rarely aligns perfectly. The gap between when you make a sale and when cash actually hits your bank account can create severe pressure, especially during slower periods.

Consider this common scenario: You made strong sales in November and December, but your customers have 60 or 90-day payment terms. By late January and February, you’re receiving payment for what were actually holiday sales. Meanwhile, you’re making current sales that won’t convert to cash until well into Q2, and you still have to cover today’s expenses with yesterday’s revenue. Add in estimated tax payments, annual insurance premiums, and other Q1 expenses, and January becomes an especially tight month for many businesses.

How Your Sales Cycle Affects Cash Flow

Your sales cycle determines how quickly revenue becomes usable cash. The cycle starts with the sale itself, but the timeline varies dramatically depending on your payment terms.

Cash sales are straightforward, but credit sales require careful planning. You need to understand your credit terms clearly. Is that invoice expected to be paid in 30 days, 60 days, or longer? And if you have always given 60 to 90 days to pay, can you move those terms to 30 days to get cash in hand more quickly?

Effective cash flow planning also means tracking who still owes you money and when you need to make collection calls. Different industries have vastly different sales cycles. A retail business converts sales to cash almost immediately, while a defense contractor might spend months on research and development before selling a product and collecting payment.

Strategic Cash Disbursement Planning

Once you understand your cash inflows, you can strategically manage your outflows. Your cash leaves the business through three main channels: materials, payroll, and overhead expenses.

The key to maintaining healthy cash flow is hanging onto your cash as long as possible without incurring penalties. If you made a sale in early December but won’t collect payment for 90 days, you might not need to pay your vendors for 30 to 60 days. If you use a credit card strategically, you could extend the due date by 30 to 45 days.

Your vendors are likely experiencing their own cash flow challenges. They don’t need your money immediately any more than you need to part with it. Take full advantage of the payment terms your vendors and credit cards offer. Those dollars are worth more sitting in your bank account, giving you options, than they are in your vendor’s account.

The goal is simple: collect money from customers as fast as possible, and pay vendors as slowly as allowed by your terms.

Cash Flow Forecasting and Building Reserves

Cash flow forecasting is typically done on a 13-week rolling basis, covering one quarter at a time. However, the right timeframe depends on your specific sales cycle and business model.

Beyond forecasting, building cash reserves throughout the year creates a rainy-day fund for unexpected challenges or opportunities.

CJG Partners helps businesses develop cash flow planning strategies tailored to their unique sales cycles and industry demands. Contact us to strengthen your financial planning and gain better control over your cash flow.