Financial analysis facilitates better cash flow management for Alaska companies: indispensable tool that can help businesses.

• Author: Barbour, Tracy
• Position: FINANCIAL SERVICES

Financial analysis is an indispensable tool that can help businesses better manage their cash flow, minimize financial problems, and capitalize on investment opportunities.

Cash flow analysis and cash management are functions that are typically focused on more by larger, more well-established companies. However, all types and sizes of businesses can--and should--use financial analysis to monitor their cash flow, according to Jim Hasle, managing partner for BDO USA LLP's Anchorage office.

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"Depending on their sophistication and size, businesses need to be intentional and deliberate about cash management because it really is the most important thing for operating effectively," Hasle says. "That involves looking at the difference between their cash inflows and anticipating cash outflows that will be needed."

Cash inflows include the transfer of funds to a company as a result of core operations, investments, or financing. These transfers can involve payments from customers, the sale of property, legal settlements, loans, and other sources. Cash outflows include transmission of funds by a company due to payments to business partners, employees, suppliers, or creditors, as well as the acquisition of assets, purchase of investments, and payment of expenses.

Most Important Business Asset Is Cash

In the realm of finance, a common cliche is "cash is king." Cash is indeed the most important business asset, which makes cash flow management critical to success, according to Shane Baird, a certified public accountant with Anchorage-based Thomas, Head & Greisen PC.

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A business has to generate a positive cash flow to survive, which means long-term cash outflows must be less than long-term cash inflows. Without effective cash flow management, a business could experience severe negative consequences, such as not having enough cash to cover operating costs or debt service payments. This could lead to the worst-case scenario: bankruptcy.

But before such an extreme situation occurs, there will be warning signs throughout the cash management process, Baird says. These could include not being able to collect on receivables quickly enough, borrowing on a line of credit to pay employees and vendors, and missing opportunities to invest in capital assets that could pay dividends down the road.

On the positive side, effective cash flow management can have the opposite effect. It can increase liquidity, generating a surplus of cash. If the excess cash will not be needed in the near future, businesses can make adjustments to make better use of the funds. Hasle explains: "They have to do a risk analysis to see if they want short-term investments, such as CDs; other investments, such as treasury bills, stocks, and bonds; or longer-term investments, such as opening new business lines."

The key advantage of using financial analysis to facilitate cash management boils down to financial liquidity, Hasle says. "The overall benefit is businesses can maximize the use of their cash toward their strategic objectives within their company," he says.

Financial consultant Heather Eldred says most companies have a line of credit already established to address normal fluctuations in cash needs. "With good cash flow forecasting, they will have plenty of time to make proper adjustments to...