Examples of Cash-Flow Management Tools

There are two ways to do cash flow with software: using a standalone tool, or using tools included in a broader software package.

Built-in Tools

Many business accounting and enterprise resource planning applications include cash flow management tools among a host of other financial management capabilities. The key advantage of this integrated approach is that you can easily start your cash flow projection by using your actual financial results, as determined by the accounting application.

Periodically, when you want to update your cash flow projection, perhaps every month, the actual results from last month can also be updated by your financial application. The downside is that you are limited to the capabilities of the cash flow tool built into the application. If you want to prepare cash flow projections on a weekly basis and the tool offers only monthly periods, you're out of luck.

Furthermore, the tool may offer insufficient calculation flexibility for some situations. Rather than prepare one cash flow projection, some businesses with volatile financial results prepare several: best-case and worst-case scenarios, along with the most likely outcome. This range of possible cash flow outcomes helps highlight the risks and rewards of following certain financial strategies. Built-in tools may not offer such multiple scenarios.

Example: QuickBooks

Intuit's QuickBooks small business accounting application is the most popular tool used to manage cash flow among AllBusiness.com readers who answered an online survey. In addition to strong capabilities for managing current assets such as customer accounts receivable and inventory, the cash-flow forecasting tool in QuickBooks Premier 2008 is quite flexible. You can select from a wide range of projection periods: daily, weekly, every two weeks, four weeks, bimonthly, monthly, quarterly, and yearly.

Why does QuickBooks offer so many period options? Because payroll is a significant cash expenditure for most businesses, but payroll periods vary by business. QuickBooks lets you select a cash-flow projection period that matches your pay period to see if you'll have sufficient cash to meet your payroll. QuickBooks also lets you export your financial results to an Excel spreadsheet, if you require additional calculation flexibility.

Standalone Tools

If you select a standalone cash flow management tool, you can choose one that delivers all the capabilities you require for your business. If you want to prepare projections based on 10-day periods, with three different scenarios for each period, you can find a tool to accomplish it. A spreadsheet offers both flexibility and calculating power, so it's well-suited for cash flow projections. A spreadsheet even lets you consolidate the cash flow results from different divisions that use different accounting applications.

Unless you're an experienced spreadsheet jockey, developing a cash flow management spreadsheet from scratch can be a daunting task. However, help is available in the form of prepared templates you can purchase that do all the calculations. You'll need to decide if they suit the needs of your type of business. Spreadsheets can be easily modified, so you can start with a purchased template, then modify it to more closely to meet your business requirements.

The principal drawback of using a standalone cash flow tool is the issue of updates. How are you going to get your updated actual financial results into the tool when you prepare your next periodic projection? You may need to experiment with import and export settings in your accounting application and your cash flow tool to determine the easiest method. Alternately, if your cash flow projection isn't too detailed, it may not require much time to simply type in the new numbers.

Example: Excel

Microsoft's Excel spreadsheet is the second most-popular cash flow management tool among AllBusiness.com readers surveyed. Excel is a component of Microsoft's Office suite, so it's already installed on many desktop computers, which no doubt contributes to its popularity.

Many accounting and ERP applications support exporting financial data to an Excel spreadsheet, which eases your update pains. However, your general ledger account structure may not match your preferred cash flow projection report. In that case, look for capabilities that can map accounts to your report.

Microsoft Office Small Business Accounting provides some of the tightest linking with Excel, as you might expect.

Keeping Frequency in Mind

How closely do you need to monitor your cash flow? For many companies, month-by-month projections for the next 12 to 24 months are sufficient. However, some businesses, such as retailers, might prefer more frequent projections, such as week-by-week. A few businesses that handle a lot of cash, such as financial institutions, prepare daily cash flow projections. At the other end, a small business with simple needs may be able to get by with quarterly projections.

Most cash flow management tools can handle preparation of monthly projections for one or two years in advance. If you require a period of different duration or need to project further into the future, check to ensure the tool can handle it. Bear in mind, however, that the utility of cash flow projections too far into the future may be limited. The cash flow projection for the 60th month out may bear only a faint resemblance to reality.

The duration of the cash flow projection period usually relates to the frequency of revisions or updates to the calculations. The shorter the period, the more frequent the updates. The frequency of your revisions and the amount of detail in your projection will determine how important it is to have the capability of automatically importing the latest actual number from your financial accounting or ERP system.

Is your business seasonal with well-established fluctuations throughout the year? Check to see if your tool can automatically account for these variations. Otherwise it may project that your Rocky Mountain ski resort will take in 1/12 of its annual revenue during the month of July.