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Cash Flow, That Is

If your business is on a calendar year, then you are approaching the end of this year. Have you been tracking your performance numbers, or are you afraid to look? If you have spent most of this year looking for cash, then chances are you have not been very profitable. Managing cash flow is an important use of your time but so is developing new customers and keeping old customers happy. If your cash flow strategy edges out quality time and energy spent developing new customers or keeping existing customers satisfied, then your business is in trouble. There are tools you can use to help tame the cash flow problem, freeing up your valuable time and energy, allowing you to keep your finger on the pulse of customers.

Operating a business is based on three simple principles: Buy low. Sell high. Keep the difference. Although the process and principles are simple, execution can be a lot more complex. You have to know your unit cost-- the buy low principle-- is accurately computed and your unit selling price-- the sell high principle-- will exceed your cost by a comfortable margin, leaving a nice per unit profit margin-- the difference principle.

With these simple principles met, there are other concerns that need to be addressed to ensure that your business makes it to the end of the year. Have you sold enough units to meet your breakeven point? Have your customers paid in a timely manner? Do you have cash balances that exceed total expenses? These are just some of the cash flow questions you must be able to answer to ensure not only business survival but success.

Projecting cash flow may seem like a daunting task with no sure way for getting it right. Combine this with all of the other things you must accomplish as a small business owner, and you will feel overwhelmed. Pointing out problems is always easier than bringing solutions to the table. The rest of this article and the attached tools are the solution. Using these tools will put you in control of cash flow instead of it controlling you and your valuable time.

Cash Flow Statement Downloads

Monthly Cash Flow Status and Cash Flow Statement for Automatic Calculation (Microsoft Excel)

Monthly Cash Flow Status for Manual Calculation (Adobe PDF)

Projected Cash Flow Statement for Manual Calculation (Adobe PDF)

The starting point is to project cash flow for the next 12 months using the "Projected Statement of Cash Flow." This will provide the big picture of where your cash is coming from and where it is going for the next 12 months. The next issue is to measure your progress against your projected budget, i.e. cash flow statement, throughout the year, which is accomplished by using the "Monthly Cash Flow Status" worksheet.

The value of this worksheet becomes clear after completing each section. Problems will become apparent, allowing you to focus on the critical problem areas. The problem areas will be in important parts of your business payments, collections, production, sales and marketing. The worksheet is designed to meet the cash flow needs for manufacturing, service and retail businesses. Manufacturing and services businesses construct their products or services and have measurable work in process, i.e. jobs that have not been invoiced. Retail businesses sell from inventory, usually on a cash basis or with credit cards, and manage transactions.

Begin by completing the "Cash Out" section listing aging and unpaid bills. It will give you the total amounts owed at the end of the month separated into current (up to 45 days) and overdue (over 45 days) categories. Pay close attention to payables over 45 days, as this indicates potential cash flow problems and suppliers that you may want to contact to make them aware of any payment delays.

If you invoice and allow payment terms for customers, then list and age money owed to your business, categorizing by days. Look closely at amounts over 31 days as this could indicate potential payment/cash issues. Now, enter all "Available Cash" balances including petty cash and till balances. At this point, the total "Cash In" is complete, and "Bam!" a surplus or deficit appears.

The next section of this worksheet covers a series of forward-looking indicators, starting with estimates of "Jobs In Process/Transactions." First, estimate value and number of work still in process. This helps you to identify jobs still being worked. These jobs will turn into invoices and ultimately cash. The value of this information would be to focus on these projects-- getting them shipped and invoiced, starting the customer payment process. Retail businesses are transaction-driven, and although they don't have projects in various stages of completion, they do have transaction history. A retail business can use this section to project the number and value of transactions based on history. Look at the previous year and corresponding month, for one or more years, to develop an estimated number and value of expected sales.

The "Pipeline" is a critical part of cash flow management that can be overlooked. In this area, record outstanding estimates or bids and any identified projects that may result in estimates. The goal is to evaluate the sales function. Bids turn into work-in-process, which turns into invoiced work and ultimately cash. If you do not have much in the pipeline, then you know that future cash will be impacted, making it clear that you need to focus on sales and marketing.

A retail business may not have a pipeline but has an inventory of products for resale, which is a great gauge to future sales. Compare the projected transaction value with your inventory value. If inventory is greater than projected sales, the marketing function needs to be ramped up to generate more sales and reduce inventory. However, if your inventory value is less than projected sales, then a focus on inventory management will ensure that sales goals can be met.

The last section records sales results on a monthly and year-to-date basis, days of cash, and finally month-to-date and year-to-date cash. This provides a great source for tracking historical changes in your business, putting you on top of important business metrics. When you have completed this process, after a few months you will have a whole new view of your business. You can develop a proactive approach to issues, directing your business to new levels of performance.

Following the cash is the secret to business success. Execution of the Buy Low, Sell High, Keep the Difference principles is the hard part of running any business. Your attention and commitment to details, along with using these tools, will let you Go With the Flow-- cash flow, that is.

Let me know if you have any comments, questions, or suggestions.
Write David W. Weatherholt at david@bnewsviews.com

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