Cash May Be King … But How Do I Control It?

If you do not have a handle on how cash flows in your business, you may not have a business for very long.

A Cash Flow Projection shows how cash is expected to flow in and out of your business over a period of time.

For the business owner, it’s an extremely important tool for cash management, letting you know when your expenditures are too high, and need to arrange for a credit line or other short term funding, or when you might want to arrange short term investments to deal with a cash flow surplus. As part of a business plan, a Cash Flow Projection gives you a much better idea of how much capital investment your business needs.

For a bank loans officer, the Cash Flow Projection offers evidence that your business is a good credit risk and that there will be enough cash on hand to make your business a good candidate for a line of credit or short term loan.

To be an effective tool, you will need to show Cash Flow Projections for each month over a one year period. Essentially, there are three parts to the Cash Flow Projection

1.  Cash Revenues:

Enter your estimated sales figures for each month. Remember that these are Cash Revenues; you will only enter the sales that are collectible in cash during the specific month you are dealing with. You will also need to understand how credit sales flow in your business.

2. Cash Disbursements:

Take the various expense categories from your ledger and list the cash expenditures you actually expect to pay that month for each month. Sort and categorize by expenses that are recurring like rent, wages, etc, and by specific terms like trade payables that are paid in 30 to 45 days to make it easier to classify.

3. Reconciliation of Cash Revenues to Cash Disbursements:

As the word “reconciliation” suggests, this section starts with an opening balance which is the carryover from the previous month’s operations. The current month’s Revenues are added to this balance; the current month’s Disbursements are subtracted, and the adjusted cash flow balance is carried over to the next month. Remember, the Closing Cash Balance is carried over to the next month.

The main danger when putting together a Cash Flow Projection is being over optimistic about your projected sales. To be an effective tool, you must be realistic in your estimates. You should be updating the Cash Flow Projection monthly and after a few months you will be able to use the previous months’ performance as a guide.

The Cash Flow Projection will be one of the most important management accounting tools that you will use in controlling and guiding your business.

If this appears too complicated or, as a business owner/manager, you do not have the time or staff to prepare this document, contact me at ron@solutionsthatfit.ca or 604.644.6618

Budgeting and variance analysis are also critical tools which we will discuss in another post.