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Cash Flows Right Out Of My Business!

Jul 10th, 2012

Monty Henderson – We’ve all heard the silly answer to a serious question about a business’ cash flow – “Cash flows right out of my business!”  As a business advisor, I hear it too often. Cash flow is critical to daily operations, yet so many entrepreneurs pay too little attention to properly developing a cash flow projection. Sadly, they become aware of it when they find themselves without cash when they have bills to pay. Usually a business closes when they run out of money and resources. Poor sales or big bills are the publicly announced reason for closure. These are the symptoms of a cash flow crisis.Cash Flow

“Cash flow is the movement of money into or out of a business… to determine problems with a business’s liquidity… Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash even while profitable.”  Wikipedia states it well.  Just because your business has occasional cash deficits do not mean it is unprofitable. Yet, if the business cannot pay its bills, it may cease operations.

The remedy to this problem is to develop a cash flow projection in advance. Many entrepreneurs just look at their checkbook balance. There is not the monthly detail of all cash out and all cash in or the anticipation of future events.  This is what a cash flow projection (some call it a “pro forma”) does for entrepreneurs. All the revenue streams and expenses are forecast at least twelve months in advance. A cash flow is not a tax document, rather it is a management tool that when performed properly becomes an accurate budget for the business. I often state that if one can provide only one sheet of paper to a banker to win a loan, it would be a twelve month cash flow projection. It shows how much money needs to be borrowed, what it will be spent on, and the capacity of the business to repay the loan.

To obtain a solid cash flow template to get started, check out Microsoft’s web site: http://office.microsoft.com/en-us/templates/12-month-cash-flow-statement-TC001017512.aspx. Then settle in front of a computer, pull up the last twelve months of business records and enter them into the spread sheet fields. Be sure to break them out month by month and pay attention to peak seasons for both expenses and revenue. For example, retailers may have peak sales November and December, followed by slow sales in January and February. They may have to buy a bunch of inventory in July to be ready for their peak season. Now you have a base with real data to work with.

Next, look forward to the next twelve months. Tweak revenue and expenses by percentages or by estimates.  If you buy a lot of gas and you expect prices to go up 10%, adjust the forecast accordingly. If a big promotional event is planned, add the additional marketing expenses and resulting increased sales. After the forecast is created, use it as a budget. Then for example, if a sales agent wants you to buy twice your normal volume, don’t bite unless your cash flow allows you that increased amount. A good manager will track his or her cash flow to see if sales goals are being met and cost projections are in line.

Need help with this task? Contact your local Indiana SBDC business advisor and they’ll help you get started.

Monty Henderson is in his fifth year as a Hoosier Heartland Indiana SBDC business advisor, and in his thirty-first year as an independent businessman. Working from the Kokomo office, Monty has helped hundreds of entrepreneurs. ISBDC business advisors have tools and resources specifically supplied to them to help their clients grow their businesses. All counseling is by appointment without fee. You may contact him at mhenderson@isbdc.org and follow him on Twitter @montysmemos.

*Photo via iStockphoto.com