Be realistic about sales, expense levels

If you take an accounting class you’ll cover the income statement and balance sheet which tell you how much money you’ve made (or lost) over a period of time and provide a tally of your assets and liabilities, respectively. It usually takes a while for the class to get to cash flow statements, but for many small businesses, managing cash and being able to project future cash requirements determines whether they survive or not.

If your business works with an outside accountant to complete your annual financials, you probably receive the traditional cash flow statement in your annual audit along with your income statement and balance sheet. The cash flow statement identifies which business activities have affected your cash position over a specific time period, showing you cash inflows and outflows from your operating activities as well as how cash has been impacted through investments in capital equipment and from financing activities. You may be struggling to figure out why your cash position has diminished even though your company has been profitable. The traditional cash flow statement will help you figure out whether this is due to customers that are slow to pay their bills, whether you’ve been overspending on equipment or other purchases, or whether you’re in a period where loan re-payments have exceeded the money you are collecting in sales.

While the traditional cash flow statement helps you understand what has historically happened in your business, the cash flow projection identifies where future funds will be spent and whether cash is adequate to cover upcoming expenses. Like your personal budget, the cash flow projection can be done on a monthly or weekly basis, and it compares the estimated cash coming into a business versus the estimated cash going out of a business to help identify liquidity problems before they occur. For companies that are struggling to know whether they have the cash to pay their bills or make payroll, try a 13-week rolling cash projection in which you identify all expected cash inflows and outflows on a weekly basis for the next four months. If your cash position is stable, monthly projections are adequate and will help you determine whether you have the cash to purchase equipment or to build inventory for future sales.

Although the cash flow projection is simple in concept, estimating the timing of cash receipts and disbursement can be difficult. You must first recognize lags in when you receive payments and when you pay your bills. Do you offer 30 day terms to your customers? Do your customers actually pay you in 30 days? Will you receive cash inflows from other sources? All cash receipts should be included in your projection. Likewise, you need to estimate your weekly expenses including payroll, utilities, rent, and other cash outflows of your business. Be realistic in determining sales and expense levels as well as the timing of cash receipts to make your cash flow projection a valuable management tool.

Liquidity issues are a key pitfall to small business success, and if you ever want a bank loan you can be sure that your friendly banker will want a firm handle on your cash requirements. Take the time to build a realistic cash flow projection to make sure you have the cash to cover your business needs.

Do you have a business question or topic that would make a good column? Send your ideas or questions to jeff.neuville@b-assistnc.com and share your business experience with others.