money tree

Manage Your Cash Flow

As a business startup, do you know how to manage your cash flow? It is a real issue for businesses in their beginning years and during periods of growth. Although businesses exist to make profits, their actual purpose is to create wealth or cash.

Many businesses fail, not because they are not making profits, but because they do not have adequate funds to keep the business operating. It is vitally important to manage and forecast your cash to ensure that no surprises arise.

Review Your Cash Flow

As everyone knows, a business plan, which includes a financial budget, is an important component of beginning a business. The budget helps you assess if the business is doing what you expected it to do. The comparison of actuals to budget informs you of problem areas or opportunities that you did not anticipate. By doing adequate reviews, you can anticipate problems before they become enormous. The same is true with cash. Preparing a cash flow budget as part of your financial business plan is very important. You would forecast where and how much cash would be used to fund your business. A carefully thought out plan will tell you if you have adequate financing. Another added benefit – if you ever plan on approaching the bank or other lending facility – they will require a cash flow forecast.

Cash Flow Analysis

As with the financial budget, comparing your actual results to your model or forecast is all- important. You can pinpoint areas that are consuming too much cash and make appropriate changes before you are unable to pay your bills.

Each type of business has its own elements that need to be managed to ensure that cash requirements can be met. Some are simple to predict and others very complex. For example, this business model is very simple and the cash forecast is easy to prepare. Let’s examine:

Anticipated revenue – $30,000 all paid in cash or credit card
Anticipated expenses – $25,500 all paid by cash or cheque
Cash flow model – Cash in $30,000 less cash out $25,500 = $4,500 positive cash flow

In this case, it is simple to see the flow of cash and realize that as long as the revenue exceeds the expenses, you will have a positive cash flow. However, if the company has debt to repay of $5,000 per month, after loan repayment, there would be a negative cash flow.

Brunette looking worried over bills in kitchen

Forecasting Inventory for Cash Flow

If your company needs to carry inventory to provide to customers, additional cash is required. The amount of inventory required should be forecasted to match sales noting that the amount will increase as your sales increase. This investment in the company is a permanent use of cash, meaning that you will spend the cash but when the inventory is sold the cash will be used to buy new inventory so you never really have the cash again.

The Impact  of Your “Terms of Sale” strategy

The terms of sales have a big impact on cash. If you have to offer 30-day or 60-days terms, you will have provided the goods to the customer but have not received any cash to pay your suppliers or expenses. There is also the extra concern: terms are given but the customers do not pay within the terms. This is hard to predict but can have a huge effect on the cash required to keep the business going.

A more obvious use of cash is the purchase of fixed assets like equipment, leaseholds or automobiles. When starting a business, it is usually easy to predict the cash required to invest but few entrepreneurs spend time planning expenditures for growth or replacement equipment.

Cash Flow Modelling

Each element of the business needs to be examined to determine the impact on the cash flow. Use your best knowledge to build the model and then, as your business progresses, test against your assumptions to ensure they were sound. If not, adjust the model and determine the impact to ensure your cash flow is still adequate.

Cash planning is an ongoing process and requires the same dedication as reviewing your financials. The more time spent planning, the better the results. Remember that when your business is growing, it could be consuming more cash than you have available. Are you planning your cash needs?

Betty Robertson, CPA, CMA and financial consultant, XL Consulting Group
XL Consulting Group is a small business advisory company offering clients strategy, planning and marketing advice.