Cash Flow, Larger Organizations

Cash flow control for larger companies is generally a bit different from what we discussed in our "Cash Flow--Small Business" entries. (Also keep in mind that "large" and "small" are relative terms. What seems large on Cape Cod may be small in Boston.)

This is just a bare-bones outline of how it is done.

Cash flow control for a larger organization generally begins with a sales forecast for the coming year. Such forecasts are usually based on what has happened over the last five to ten years. An average rate of year-over-year sales increase is derived and used to estimate what the coming year's sales may be.

From the sales figure, a projected profit and loss statement can be put together. Many of the expenses can be estimated using the rate of sales increase. For others there may be specific data that can be used.

Once a projected net income figure has been calculated, it can be plugged into a projected balance sheet. Some of the assets and liabilities will naturally increase at about the rate of the sales increase. Others can be determined in other ways.

When the assets, liabilities and equity have been totaled up, it may come to light that additional funds are needed, for example to acquire new capital equipment. Then decisions need to be made about how to acquire the funds, and the costs of the funds (e.g., interest) have to be added to the profit and loss statement.

With these projected financial statements in hand, they begin to construct the cash budget. Various cash flow factors are taken into account, such as the average lag in collecting receivables and the lag in paying bills. A cash budget for the coming year is calculated, then it is broken down into monthly amounts. The monthly budget is for planning. Then a more detailed daily or weekly budget is drawn up for actual cash control during the coming month.

Then they have to lay the numbers out on a spreadsheet and figure out what their cash position will be each month for the next few months. A seasonal business may have large fluctuations in cash requirements. During some months there may be shortfalls that require short-term borrowing.

This is a lot more complicated than the small-business methods outlined in earlier posts, and it would likely require extensive attention from specially trained people.