Question

How well do you think small businesses do long-term financial planning and cash budgeting? If you were a consultant to a small business, what would be your advice to them in developing financial plans and cash budgets?

Cash flows are obviously what keep the company running smoothly. However, many companies choose to hold large amounts of cash. What are some possible negatives that could arise from a company hoarding large amounts of cash?

Answer 1

In general small businesses tend to give the due importance to financial planning and cash budgeting.

As a consultant, my advice to small businesses would be as follows:

1. Keeping a track of Costs

2. Projecting Revenue

Calculating how much money the company is expecting to generate on a monthly, quarterly or yearly basis

a. Make Forecasts

b. Make Conservative Estimates

3. Make a 12 Month Cash Flow Projection

4. Keep room for Bad Debts/Late Payments

5. Adjust for Demand Seasonality

6. Incorporate the Industry/Market and Macro Factors

7. Prioritize Investments

Possible negatives that could arise from a company hoarding large amounts of cash are as follows:

a. Missed Opportunity Cost

Missing out on the potential for additional revenues that could be generated by investing the excess cash.

b. Interest Payments on Debt

Instead of paying interests on loans and other debt, the excess cash could be used to make purchases.

c. Pressure from Partners/Investors

Investors would generally want businesses to put the money back in the business for growth and hence would lead to conflict of interests.