Managing Your Cash Flow (or Where Does All The Money Go?)
The number one problem of small businesses today is managing their cash flow. A typical comment is "Why am I always scrambling for money?" The most common answer is that the business owner is not planning their out-flow so it matches their in-come. The adage "timing is everything" has never been more relevant. If the business owner doesn't pay close attention to the timing of their receipts and disbursements, there will be a painful mismatch.
A common practice in small businesses is simply to watch the amount of cash in the bank, pay bills or buy equipment when there is enough, and sweat out the shortfalls.
A much less stressful approach is to develop a monthly cash flow plan for the year, and then make payments according to the amount and timing of expected income, dipping into a savings account or line of credit, or postponing a payment, when a shortfall occurs.
Cash Flow Projection
For a new or growing business, the cash flow projection can make the difference between success and failure. For an ongoing business, it can make the difference between growth and stagnation.
A cash flow projection is a critical goal-setting tool used to estimate your business income and expenses over a period of time. It is an estimate of cash coming into your business from sales, investments and borrowing, and cash flowing out of your business to pay expenses, buy equipment, and take care of other business expenditures. It is the most important managerial financial projection you will make.
The simplest way to start your cash flow planning is to sit down with a computerized spreadsheet or manual worksheet and plot the amounts of cash receipts and disbursements that you have had each month for the past 12 months. Do this in detail so you know where each amount came from. Refer to your check register for these amounts. Net it all out for a bottom-line figure for each month. Your ending cash balance for one month, positive or negative, will be the starting cash balance for the next month
Then use these actual numbers to project your receipts and disbursements out over the next 12 months, month by month. See where your shortfalls and overages occurred last year, and think about whether these same patterns will occur in the future. Think of additional income and expenses that may occur and plot them in the proper months. Once you have 12 months of projections, then project out for another year or two.
You now have the beginning of a useful cash management tool. If you have a large cash excess in February, but a heavy insurance payment comes due in March, don't go out and buy new equipment with the excess. Save the cash for March.
Sales Projections
One key aspect of cash flow is plotting your expected sales, month by month. Be sure to break it down between cash sales and credit sales (receivables). Spend some time developing future sales projections, based on your sales history and what you realistically believe you can do in the months ahead. Remember to reduce the dollar amount of sales in a given month by the cost of the materials that you have purchased in the same month, as well as any returns you have received or discounts you have given. Sales projections are complicated by the fact that you must pay cash out for materials a month or more ahead of the time you will get cash in from the sales. If you need to add sales staff to increase your sales, their compensation will reduce your cash flow. Remember that staff who are paid only by commission or are hired only in busy months will cause greater variations in your cash flow than those whose salaries go on at the same level month after month.
Receivables
Another aspect of cash flow is the management of receivables. If you are not collecting the money due you in a timely manner, you are supporting someone else's cash flow rather than your own. Have your accountant set up a system of "aging" your receivables, so you know how much money is over 30 days due, over 60 days due, etc. Go after everything over 60 days due. They are putting a bite on your cash flow. Plot the amount of receivables you expect to receive each month.
Borrowing will increase your cash flow in the months when the cash is received, and will reduce your cash flow by the amounts of payments you make each month.
Inventory
Watch your inventory purchases. See if you can buy in smaller quantities and not have as much money tied up on the shelf. Or time your inventory orders to large sales of your products. Plot your purchases in the months they are expected to occur.
Payables
Review your payables. If you can afford to pay invoices early and bank the discount, do so. Every little bit helps. Avoid paying any so late that you have to pay a penalty. If you have many payables, age these also, so you can clearly see the order in which they should be paid to make the best of your expected cash flow. Plot your payables in the months you expect to write the checks.
Seasonal Businesses
Cash flow projections are especially critical for seasonal businesses, where peak season income must be saved to cover slow season expenses. This is particularly true for businesses that have large fixed costs, such as the expenses related to salaries of permanent employees, paying off bank loans, leases on building space, etc. For any business, periodic large expenses such as taxes, insurance, and equipment purchases can generally be covered by careful cash flow planning.
Maintain
Now that you have gone through the effort of developing good cash flow projections, use them! They are a working document. Monitor and improve them every month. Once you have tracked your cash flow month by month for a couple of years, you will begin to see patterns, and be able to maximize your positive cash balances and avoid the crunches.
If you are considering applying for a bank loan, know that one of the first things a banker will want to look at is your cash flow history and two to three years of projections. This is an indication of how well you manage your money and whether your business is able to generate the cash necessary to stay in business and make the loan payments.
Assistance
There are several ways to get the scoop on cash flow planning:
- Ask your accountant to help you set up a cash flow tracking and projection system.
- Take a class from the Small Business Administration or your nearest Idaho SBDC.
- The NxLeveL entrepreneurial training course offered by the Idaho SBDC includes cash flow planning.
- Make an appointment to see an Idaho SBDC consultant.
- Talk to your banker.
- Check out your local library or bookstore for The Cash Flow Control Guide by David H. Bangs, Jr.
- Download an Excel cash flow spreadsheet from www.toolkit.cch.com
Unless you like living on the edge, learn to be an expert in managing your cash flow. Your business will thrive, and all the people around you will be grateful for your newfound expertise.
By Marguerite Mason
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