The Cash Flow Statement
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The Right Tool for the Job
Cash is the life blood of every business. The ebb and flow of cash is a constant and learning how to manage this cash will put you on the road to success. The Cash Flow Statement (CFS) is the right tool for the job and you can easily learn how to use it. The start of a new year and the current economic downturn make this a great time to look ahead and get a handle on your cash flow for 2009.
The CFS provides a clear picture of when cash arrives “Receipts” and when it leaves “Expenses” the difference between these two is either a positive or negative amount and will let you know if there is enough cash to finance business growth or sustainability. Building a CFS will require some initial research into the receipts and expenses of your business; when cash arrives or leaves and then converting these flows to a monthly basis, see Table 1 Cash Flow Statement Sample.
The company represented in the CFS Sample has a positive balance overall but three months with negative balances during slower sales times i.e. November, December and January. Fortunately, they have a large enough cash surplus from prior years and from currently monthly sales to cover the negative cash flow.
When there is a cash surplus the problem becomes managing that cash to provide maximum returns. However, if a business has a number of negative months and a small cash surplus then a plan to navigate these times is needed. Using the CFS is a pro-active approach that let’s you see problems coming, giving you time to react and come up with a good plan. With enough time you can look at some or all of these options as possible solutions:
- Increasing Sales – Train non-sales staff in sales and offer bonuses, commissions, based new sales.
- Speed up cash collections – Consider offering discounts or the use of down payments
- Slow down expenses – Trim overhead or fixed expenses when possible. Remember that marketing/advertising if working properly should be considered purchasing sales and may not be an expense.
- Suppliers – Communicate with key venders they may be able to extend your payment terms.
- Cash Infusion – The owners may need to add more cash.
- Financing – Line of Credit, Accounts Receivable Financing, and Inventory Financing may be options.
Being pro-active and using your imagination may provide you with pleasant surprises and may eliminate or greatly reduce negative balances. When you have looked hard at options 1-5 and you decide to talk with a lender it is always better to have a good plan; how you have handled items 1-5 and the most important part of that plan will be a realistic CFS projections.
Developing a CFS should not be a one time event but an ongoing monthly process, which may need to be refined as time goes by. By starting now building a CFS will make it easier to complete the process in the future and you will have a really great historic look at the ebb and flow of your businesses cash. The hard work up front will pay dividends as the process is refined and the CFS becomes easier to assemble. It is always easier to handle cash flow when there is a surplus the real management test however, is successfully navigating through an economic downturn when sales may be dropping and cash gets tight. Consider this 2009 as a real test of your management ability and an opportunity to gain valuable experience. Both you and your business will be better for this.
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Library of Congress Cataloging-in-Publication
Business/News & Views® / by David. W. Weatherholt
ISBN: 978-0-9823041-1-2 (electronic format)
Published in the United States of America through www.waconsult.com
Published in an electronic format by Weatherholt & Associates, LLC
First Trade Publishing: October 2008
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