Cash flow is important because it predicts surpluses and shortages, and allows for properly planning for your business. There is a difference between macro and micro cash flow, and we are speaking today to Katina Peters, Partner, CPA and vCFO with PJS & Co CPAs, who can help us understand and provide her insights on the topic. We have a cash flow series available with some basics and a deeper dive into cash flow topics if you’d like to explore the topic of cash flow further.
What we cover in this episode:
- 02:13 – What is the difference between macro and micro cash flow?
- 04:03 – Macro cash flow
- 07:55 – Micro cash flow
- 12:04 – The additional benefits of macro and micro cash flow analysis
- 23:34 – Conclusion
What is the difference between macro and micro cash flow?
In general, the macro analysis is looking at cash flow from a bigger picture view point. What is going on with the major inputs and outputs that affect your cash flow? The macro analysis gives a quick synopsis and overview. The micro cash flow analysis is much more detailed and specific. The micro analysis digs deeper into the timing of customer payments, vendors, et cetera, and provides more detail. Obviously, the more detailed you get, the more complex it becomes. While we recommend using both micro and macro analysis, macro is a great place to start.
Macro & Micro Cash Flow Templates
These free templates will help you gain more control over your cash flow situation.
Complete with instructions, these straight forward templates show inflows and outflows that will help you manage your cash flow on a monthly basis with the Macro approach and on a more granular level with the Micro Analysis.
Macro cash flow
The macro level of cash flow analysis gives you a quick look and uses the average inflows and outflows of your major items. What’s your major average production revenue? What are your major cost of goods and normal overhead? It is normal to have fluctuations but the goal is to get your averages since you’re just trying to get the big picture at this macro level of analysis.
This level of analysis improves your ability to make decisions and properly plan for your business. You will be able to identify trends, and better prepare for any bumps in the road ahead. For example, when you are looking at the end of month, end of quarter and end of year, averaging your large cash inflows and outflows, you gain visibility around potential issues like running out of money for critical business operations so you can get a line of credit for a few months, or potentially a loan to get back on your feet.
The macro overview allows you to set up cash reserves as well. The general rule of thumb is to have your average of 3 months worth of cost of goods sold and expenses together for an initial cash reserve that is set aside in a separate account.
Micro cash flow
The micro cash flow analysis is a much more detailed approach and gets you into the nitty-gritty details of what is happening in your business. It looks at a shorter window of time and what is happening in the near future. This option looks at what your anticipated cash flows look like over the next 8 to 12 weeks.
This version digs deep, customer to customer, considering the inflows and outflows you can expect, and when you expect them to occur. This also includes your vendors, and every single cost associated with that vendor. What is coming up? When is it going to hit? What is the projected cash flow movement for all of these items, including loan repayments? So you are starting with the current cash you have on hand, and plugging in all the details available.
In looking at the micro analysis, things may become clearer on the macro level as well. You might find that you were a little off on an estimate on the macro analysis, and the line item by line item detail on the micro level will help you to realize some macro assumptions were off. There may also be cash inflows and outflows that were not visible in the macro analysis due to timing. For example, if you are only looking at cash flow on a monthly or quarterly interval, you may not see an issue that arises mid-month.
The micro level allows you to pay attention to specific trends for the near future, and make changes quickly. Katina stated, “It’s just like peeling away the onion, and getting more information as you go. You can see the macro trends looking at financial statements and things like that, but the micro trends really give you much more insight into what’s going on with the business, as well as the cash flow.”
The additional benefits of macro and micro cash flow analysis
Along with the peace of mind that you will get from knowing when and where your cash is going, this process can also detect and highlight other areas of your business that may need attention or refinement. It can help with identifying problems in processes and procedures, specifically when your looking at the micro cash flow analysis. It can help you identify issues with customers that may not be paying promptly, and zero in on specific issues where you may need to make changes in your policies with them. Perhaps you will find out that a certain customer or vendor is not the right fit for your business, and this analysis can help you make decisions operationally.
Using these cash flow analysis models will also allow you to improve on long-term and short-term planning for your business and understand if you have the cash availability to handle the growth you are planning or what may be coming down the pipeline. Knowing where you stand also allows you the ability to plan for cash reserves, as well as the tax needs for your business. Many of these items get overlooked, but extra cash reserves can be squirreled away when you know where you stand, and you can put away a little bit at a time.
The largest benefit you gain by conducting these types of analysis is your control as a business owner in knowing the timing of your cash flow. You gain visibility around the monthly, weekly, or daily inflows and outflows, as well as the bigger picture for your overall business. You will be able to plan out your major purchases, plan financing if needed, plan for your business growth and cover yourself if there are unexpected events. Being preventative and proactive in your business in regards to cash flow is key to setting yourself up for success.
Cash flow is important, and using macro and micro cash flow analysis tools will help you predict surpluses, shortages, and properly plan and make changes for your business. While we recommend both types of analysis, the macro cash flow analysis is a great place to start if you aren’t currently tracking this.
Macro cash flow offers the big picture view of your cash flow situation when it comes to monthly, quarterly and annual analysis. The purpose of this tool is to allow visibility into the large inflows and outflows you expect and understand where you may have issues so you can do something about it before it becomes an emergency.
Micro cash flow analysis digs deeper and gets detailed to offer even further insights. This tool can help you to see where you can improve processes in areas like accounts receivable, for example. Using these tools will help you continue to grow and understand your business as much as possible.
Links mentioned in this episode: