Managing Your Business Cash Flow
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You wouldnt drive a car without a gas gauge or speedometer, and
if youre driving on an empty tank, you wont get very far. Then why
would you make financial decisions without the proper tools?
Businesses must master controlling the flow of cash. Cash flow
planning helps eliminate uncertainty, identify obstacles and move
forward armed with information. With information you can make plans
and changes to improve your business.
Why a Cash Flow Statement?
Many business owners believe their financial statements will
give them all the information they need. Financial statements are
an historical tool that shows you where your business has been. A
Cash Flow is the fancy name for a working budget that tells you how
much cash your business actually has. Working in sync with your
balance sheet your cash flow should be an easy-to-read tool that
allows you to monitor sales, costs, profitability, collections and
cash. It allows you to plan for future cash needs for growth, while
identifying operational issues requiring immediate action.
Successful cash flow planning does not require a degree in
accounting. What you need is real-time understanding of where the
cash is originating, where it is going, and how much is left over
(just like you do at home). Businesses need to operate with a cash
flow model that looks ahead one year, month by month, and is
updated with actual results every week.
Create a Worksheet
The formula for successful cash flow management is deceptively
simple. Money in. Money out. Money left over. If there isnt any
money left over, then you need to do something differently.
Start with Sales. Sales is work performed that is documented by
cash register receipts, guest checks or invoices. Project the
amount of sales you anticipate month-by-month starting with the
current month. Sales should fluctuate when you consider the
seasonality of your business. Break the sales into categories and
Project your collections month by month. Collections are the
money you put into the bank in the form of cash, checks or charge
card vouchers. If Sales do not equal Collections, you either have
accounts receivable or a cash control problem.
Review your expenses. Define your expenses into two major areas:
Cost of Sales (expenses that fluctuate with sales such as product
costs) and Overhead Expenses (expenses that do not fluctuate with
sales). Define the cost percentages for your major sales
categories. Forecast all other Overhead Expenses (rent, utilities,
insurance, licenses, etc.). Project all expenses out in the month
they will be paid.
Forecast your payroll. List your current and anticipated
employees and categorize them as Cost of Sales labor or Overhead
labor. Cost of Sales labor may be projected in part by a target
labor cost percentage. Estimate payroll expense per employee
(average hours worked, rate of pay) over the next twelve
Evaluate Your Profitability
With monthly sales and expenses projected, business
profitability, feasibility and value can be determined. Total Sales
minus Total Cost of Sales Expenses (including Cost of Sales
payroll) minus Total Overhead Expenses (including Overhead payroll)
equals Monthly Cash Reserve. This is also your profitability. Is
there any money left?
What debt are you servicing? Evaluate this debt separately from
your profitability. Debt takes many forms including notes, loans,
credit cards, leases, and lines of credit. When businesses must
restructure their debt in order to improve cash flow, lenders
expect the businesss Balance Sheet to look a certain way in order
to qualify for financing.
So, Whats Next?
Once this working budget is assembled, a break-even sales volume
can be determined that generates enough profit to cover debt load
and have no cash loss. Your cash flow objectives are now clarified
and strategies can be implemented. Any issues that caused a cash
flow problem will now be corrected.
With your Cash Flow mapped out, you have the beginning of
Cash Flow Planning brings financial stability to a business
through pro-active budgeting, monitoring and adjustments. You will
understand where you are today and what your options and priorities
are. You will be able to forecast your cash needs and gain control
of your business. With the use of a Cash Flow, your business will
have more money and a road map for the future.
About the AuthorWritten by Monte Zwang of Steele Development Corporation, a
consulting firm specializing in business development and financial
strategies. You can reach Steele Development by calling
206.878.9666 or online at www.Steeledevelopment.com.
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Article Published/Sorted/Amended on Scopulus 2006-06-08 23:38:11 in Business Articles