Cash Flow Plans
What it is:
How it works/Example:
Let's assume that Company XYZ is a start-up widget maker. It expects to sell 4,000 widgets a month at $50 each, pay cash expenses of $50,000 in some months and $100,000 in other months, and buy $75,000 of equipment in December.
Company XYZ should create at least a basic cash flow plan to ensure that it has enough cash on hand to meet these expenditures in the periods in which they occur. Otherwise, it may fall short of its cash needs and either have to raise capital quickly (which is expensive), lay off employees or even cease operations.
From an insurance perspective, a cash flow plan often means simply paying an insurance premium in installments rather than all at once. For example, car insurance premiums are often assessed once every six months. Rather than pay one very large amount twice a year, insureds often negotiate cash flow plans with their insurance companies whereby they pay one-sixth of the bill every month so as to "smooth out" their cash flows each month.
Why it matters:
Cash is king, both at home and for most companies. Although corporate budgets are crucial, the non-cash portions of those budgets are often of little use in helping companies determine whether they'll run out of cash in a given period. Having a cash flow plan helps companies predict when they'll need to raise capital or borrow more.
Likewise, cash flow plans in the insurance business may delay the receipt of cash for insurance businesses, but they also likely ensure a higher rate of collection from their insureds, who are usually better able to make small, regular payments rather than large, infrequent payments.