Cash outflows are the sums of money paid out by a business or individual during a specific period.
Primary Implication
The fastest way to go out of business is to allow cash outflows to exceed your cash inflows. Every time you spend more money than you bring in, you create a cash shortfall. As long as you maintain sufficient cash surplus to cover the shortfall or have access to a line of credit, your business will operate with minimum additional difficulty.
Fail to have access to cash to cover a cash shortfall you will have serious management problems. You protect your business from suffering this fate by performing disciplined cash management to know what cash outflows you can afford based on your planned cash inflows.
Overview
To prevent cash outflows from exceeding cash inflows, you need to know the following for your business:
- Receipt date and amount of Accounts Receivable collections
- Payout date and amount of planned Accounts Payable payments
- Payment date and amount of recurring expenses
- Anticipated cash receipt date and the amount for planned asset sales
When sales slow, the number one rule of business is to conserve cash. Anytime cash becomes tight, the number one cash flow strategy is to conserve cash.
The “conserve cash” strategy is particularly useful in the near-term for businesses with few fixed costs. For most businesses of significant size, conserving money this week comes down to using one of the following cash-conserving strategies:
- Cut unnecessary expenses.
- Reduce inventory.
- Delay paying invoices until a few days before they’re due.
- Negotiate delayed payment terms with suppliers, if necessary.
In the long-term, conserving cash for larger businesses comes down to managing expenses downward as a percent of sales. This is most effectively done through P&L Statement variance reporting for both actual-to plan and year-over-year results for the same accounting period.
