Get to Know Your Cash Flow

... From Biz2Biz NWA February 2009

For Good (Business) Health: Get to Know Your Cash Flow

By Steve Ferguson / Chapter Chair / NWA SCORE

Many small business owners mistakenly believe that talent, determination, and hard work will ensure success. While these are important, success also requires sound financial management: understanding a balance sheet, monitoring a profit-and-loss statement, and managing cash flow through the business.

Just as watching your blood pressure is important to your personal health, monitoring cash flow is vital to the well-being of your business. Cash coming into your business monthly through sales and exiting through necessary expenditures are rarely consistent.

Not monitoring cash flow may have serious consequences. Even if sales are strong, slowness in converting them to cash or experiencing insufficient cash when critical expenses are due can lead to business failure. Also, in any business, minor “hiccups” may be expected, but they can also be an early warning of potentially chronic problems ahead, especially if other indicators such as sales seem positive.

Monitoring and predicting cash flow is actually a matter of following some simple, common-sense financial management practices. These basic practices should help you manage money more effectively.

• Set up a Historical 12-month (24 months is even better) Statement of the Flow of Revenues and Expenses through your Business. Use monthly profit and loss statements, adjusted to reflect cash receipts and cash expenses.

• Prepare a Sales (Revenue) Forecast. Examine closely the historical patterns of your sales and cash collections. Adjust these for expectations of changes to your business in the months ahead: economic difficulties, changes in business practices, and other things may change your projections. Ideally your forecast should be a year, but try to do at least 3-6 months, then adjust as actual data comes in.

• Prepare an Expense Budget (Forecast). This requires a fair amount of detail work. For example, look closely at the following categories: general operating expenses; inventory purchases when necessary; tax payment due dates; debt/interest due dates; payroll needs.

• Finally, the revenue and expense forecasts can be combined into an operating budget. Note specific due dates for payables and receivables, and regularly use them to get a snapshot of your cash flow status. With that information, you’ll be better able to make short- and long-term plans, spot potential problems, and avoid potentially crippling cash crises.

As an entrepreneur, you want to minimize the risks and maximize your chances for business success. If you don’t know how to develop a cash flow management plan, seeking advice and assistance will help you manage operational details that can make or break your business. Your accountant can help with these issues. Another great source of help is NWA SCORE.

Cash flow is just one critical financial issue facing your small business. To learn more, contact SCORE "Counselors to America's Small Business." SCORE is a nonprofit organization of more than 10,500 volunteer business counselors who provide free, confidential business counseling and training workshops to small business owners. You may reach us at info@nwascore.org, www.nwascore.org, or 479-725-1809.