Cash Flow

Helping Businesses Thrive and Grow

Cash Flow

Cash in the bank is necessary for a business to keep paying the bills and stay in business.  Many factors can contribute to cash flow problems including:

  • a lack of profit,
  • seasonal changes in sales,
  • growth,
  • increases in accounts receivable, and
  • start-up expenses.

Careful planning, projections, and decision making are necessary to prevent business failure.  Being super rich can also help prevent cash flow problems, but doesn’t mean they can’t occur. For example, if substantial assets are tied up in real estate or other long-term investments, even those with a high net worth can run out of cash.

Cash Flow Projection

The Cash Flow Projection is very similar to an Income Statement except it is adjusted to include only cash transactions.  The cash flow projection starts with the beginning cash balance.  The time period is usually monthly.  Cash sales, other revenue, and receivables collected are added.  Cash expenses and cash payments on accounts are subtracted.  Loan payments including interest and principal are subtracted.  Owner draws are subtracted.  Owner investments, loan proceeds, and line-of-credit advances may be added.  Capital expenditures are subtracted.  The result is ending cash.  This will be the starting cash for the next period.

If ending cash is projected to be negative, explore the possible options.  These might include the owners putting in more cash, a temporary line-of-credit, start-up funds borrowed, possible vendor credit, increased receivables collected, inventory reductions, the sale of capital assets, or reduced owner draws.

The More You Know

No one can see into the future.  Being in business is risky.  Better predictions are based on better information.  Predict good things happening.  Then, predict bad things happening.  Weigh the good prospects against the bad.  Explore the options for the business if each happens.  The more known about the business, the more likely good predictions and decisions will be made.  These projections should be reviewed and updated on a regular basis.  If the business is new, has made recent changes, has tight cash balances, or is seasonal, these reviews should be at least monthly.

North Idaho SBDC coaches are available to help small businesses develop and analyze cash flow projections.  No-cost consulting is available by appointment.

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Business owners are often optimistic about growth and see where increased expenditures will increase efficiency.  An example would be increasing inventory to increase sales, reduce special orders, and the extra time they take. Unfortunately, increasing inventory usually takes cash or credit.  Careful projections need to be made to calculate whether or when the business will have enough cash flow to safely increase inventory.  Then evaluate whether or not this is the best use of the cash.