A considerable amount of financial management that organizations do involves recording financial activities as they happen as well as analyzing and summarizing past financial activities. However, organizations do not just need to know where they have been financially; they also need to know where they are and where they will be.
To be able to spend money doing their work an organization must know how much they have to work with and what bills need to be paid with that money. This means that the organization must know not just what cash they received and what cash they spent, but also what cash they will be receiving and what cash they will be paying out. To be effective, organizations must know the answer to questions such as: What are expected expenses for this week or month? What funds do we expect to receive this week or month? Do we have enough money in the bank to cover these expenses or will we have it by the time they are due?
Cash flow analysis allows organizations to identify problems early. One major problem most organizations have is the timing of the cash flow. Cash inflow is the amount of money received from all sources and cash outflows are all payments made with cash during a period of time. Unfortunately, cash inflow (revenue) tends to lag behind outflows (expenses) creating a shortage of cash. It may be necessary to analyze cash flow on a daily or weekly basis to ensure there is enough cash to cover expenses.
Cash flow analysis will help to keep the wolf from the door but organizations will also want to look at the bigger picture periodically to see how reality is matching up with the budget. This is called forecasting. Many organizations prepare forecasts on a regular basis during the year and use them as both planning and controlling tools.
Forecasts include actual revenue and expense information for the periods incurred and project revenue and expenses for the remaining months of the year. A file should be kept for expenses incurred that have not been invoiced or paid and also for services performed that the organization has not been paid for. If the forecast is showing a deficit a plan should be in place to manage the deficit. This may mean some programs may be cancelled or purchases scaled back. If the organization received an unexpected windfall, some new programs may be implemented based on the organization's goals.
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