cash flow model

Cash is the oxygen that keeps your business alive. For the majority of companies, cash flow will have the most impact on performance and longevity. Negative cash flow and cash flow mismanagement are at the root of most failing businesses’ inability to make it past the 3-year mark. And while over a third of Small-To-Medium Enterprises (SMEs) have reported an increased need for liquidity, most businesses underestimate the importance of cash flow modeling.

Cash flow models paint a picture with a client’s assets, income, expenditure, investments, and debts to project a business’s performance into the future. These models function based on a framework that considers predicted growth rates, interest rates, inflation, and wage increases to establish where a business’s cash flow will be in a given period. Effective cash flow modeling combines financial planning and forecasting practices such as rolling forecasts and what-if analysis with traditional budgeting and strategizing techniques. This provides clients with founded expectations on future company performance, enabling them to manage their cash flow accordingly.

How Cash Flow Modeling Is Done

Cash flow models have been created to enable businesses to plan their futures and potentially prepare themselves for market fluctuations and even economic recessions. Therefore, the model used by your analyst should answer the following:

  • What your business should do to attain its current financial objectives
  • What your options for reducing your tax liabilities are
  • How to effectively balance cash in and cash out to manage personal expenditure
  • How to prevent cash droughts
  • How to prepare an eventual capital transfer to the accounts of family members or charities
  • How long your business profits will allow you to sustain your current lifestyle after retirement

Why Is The Implementation Of A Cash Flow Model Important?

Cash flow modeling facilitates the achievement of a primary business goal: solvency. By providing you insight on the available funds you will have in the future, as well as how your expenses and credit may change, it allows you to plan how to settle your long-term debts – even in a time of economic strain. It also strengthens a business’s ability to sustain itself by providing increased flexibility on investment. An effective model will allow you to strategize on diverse investment ventures, which in turn will provide you with added funding for innovation and promotion. The insight provided by cash flow models also allows businesses to gain an in-depth understanding of the primary influences on their liquidity. This can allow leadership to make crucial decisions on costs to cut, investments to increase, or supply chains to strengthen.

The in-depth financial data cash flow modeling allows businesses to set their cash driver targets more efficiently. It provides the opportunity for enhanced analysis, which your advisor can use to provide you with guidance on necessary adjustments. Cash flow models also increase capital investors’ confidence in your enterprise, which generally leads to greater access to funding, lowered interest rates, and a steadily climbing credit score.

Your advisor will help you devise a strategy to manage your cash flow based on the created model. But first, you will need to use the model to answer the following:

  • Whether you will need to plan for a range of scenarios, considering the risk(s) of each
  • How liquidity restricts your strategy execution
  • What your availability of cash flow or liquid reserves can be in the eventuality of a crisis
  • How well your cash flow’s generation fares against that of other organizations in your industry
  • How well your management understands your business’s working capital structure

How To Strategize Effectively Based On A Cash Flow Model

To create a reliable fiscal planning strategy for your business, make sure your developed cashflow model facilitates detailed analysis and accessible reporting. It should also have an accountability-placing system which enables you to isolate the causes of driver target misses. This will encourage members of your organization to monitor and improve their performances.

You will also need to communicate with your analyst about your wish for your future policies and procedures to encourage cash-awareness among your team. Ensure you maintain a rolling forecast, to get ahead of potential driver changes as they occur. This will prevent potential losses that could result from cash flow mismanagement.

You will have to avoid relying on one model scenario, however appealing it may be. You must remember that environmental, economic, and even political factors can have unexpected effects on your model, therefore “rainy-day” reserves must be created.

A Concluding Word About Cash Flow Modeling

When it comes to data modeling, it is crucial to get ahead of all the factors that may affect your business’s performance. Many businesses fail because they have overlooked the importance of effective cash flow planning and forecasting. As a result, the majority of SMEs around the country only have the cash flow to pay for 27 days of expenses. To avoid a similarly precarious position, you will need to work with a skilled advisor and create a model of your cash flow. Our team of experienced analysts will be happy to come to your assistance. Contact eCapital Advisors to leave cash flow uncertainty in the past.