How To Plan And Manage Your Cash Flow

by Tom Egelhoff

Cash. No matter where you are on the planet, if you are in business, you are going to have to know how to manage your money. One of the leading causes of small business failure is poor cash flow planning.
I don't normally write articles on accounting subjects and I am not an accountant, but this is such a serious subject I thought I should at least make you aware of the possible pitfalls that might be awaiting you.

Please consult a qualified accountant or CPA to assist you with your cash flow planning.

Begin With The Basics Of Your Money

Business cash is usually in two places; either it's cash on hand or in a business checking account at your bank. You need to have sufficient cash flow to pay bills, in reserve for emergencies and to put back into the business as investment capital.

I can't stress strongly enough that you put as much money aside as possible. One major emergency could put you out of business if you aren't able to overcome it.

For example, if your industry comes under attack with negative publicity, you may need to retaliate with increased advertising and marketing strategies that are not included in your current budget.

How Cash Flows Through Your Business

Most businesses have a 30 day "operating cycle." What this means is that over a 30 day period, you will sell products that you have on hand, some for cash, some on credit, usually with payment due in 30 days after the sale. At the end of 30 days, depleted inventory is restocked, accounts receivables (credit) is collected and the cycle starts all over again.

There Is Cash And Potential Cash

In addition to cash on hand and cash in banks you also should have some items that can be converted to cash if necessary. These are usually referred to as "current assets."

Some examples of current assets might be: Marketable securities or prepaid expenses, cash and receivables.

Cash Flow Analysis: Your Money Plan

If the business is to survive, you need a positive cash flow. The business must take in more than it spends. To accomplish that goal a plan must be in place.

Before I explain the plan there is some information that must be assembled. First, your business plan. This should contain cash flow projections for 3 to 5 years. You will need this to compare to what is actually happening with your business.

I can't stress enough the constant updating of your business plan. Ideally it should be done every six months. Most people pour their heart and soul into it when starting a business and never look at it again after the business is started. This is your plan and road map to business can you ignore it?

Next, all financial statements. These include Profit & Loss Statement, Income statements, Taxes, Payroll, and any others your accountant may recommend. The accountant can then help you prepare your cash flow analysis.

Preparing A Positive Plan

As I mentioned above, you'll certainly want a positive cash flow. If the cash flow analysis shows a positive...great keep it up. But, on the other hand, it's negative there are some changes that need to be made. Here are some ways to increase cash flow.

Collect Account Receivables: I recently worked with a company that used to have a delinquent accounts receivable list that filled a legal sheet of paper. By being more aggressive in their collections that page is less than a standard 8x11 sheet and the business is in better financial shape.

Review and Restrict Credit: American Express has made a business out of advertising how difficult it is to acquire their card. Issuing credit is a good way to build a business, but only if those given the credit pay on time. Extend credit to loyal customers who earn the privilege.

Pricing: Are you asking too much or too little? Pricing isn't about the price of a product. Huh? Pricing is a matter of perception by the buyer. If I say CD player, a price jumps into your head. The same with Lexus or Neon. Any customer will pay any price for a product as long as they are convinced that the value is there. You can raise a price if you can raise the perceived value to the customer.

Short Term Loans: Try to establish a "line of credit" with your bank. That way, if an emergency arises, you can deal with it immediately.

Increase Sales: That's easy..Right? Just go out and sell more. Not that easy is it? But, it can be done. The thing to keep in mind is that more sales are probably done on credit than cash. So, increased sales increases accounts receivable and not cash. Be very careful here. If you do a promotion or sale to increase revenue, keep a close watch on receivables. A substantial increase in sales will deplete inventory that must be replenished with accounts receivables money. If these are not collected on time your cash on hand or cash in banks will have to be depleted to cover costs.

Other Things To Consider

Perhaps a definition of "cash on hand" is in order. Does that mean you must keep every available nickel and dime in box in the back room? No. Keep a small amount as needed but put the bulk of the money to work...earning interest. This will be your "Cash Reserve." Invest the money in an accessible, interest bearing, low-risk account.

Since investment vehicles change so rapidly, I'm not going to recommend anything here. Check with your financial planner and accountant to determine the best place to invest during your current circumstances.

Do As Much As You Can Yourself

As I mentioned earlier, I'm not an accountant nor do I wish to be one. But, I do my own books for the most part. I need to know and understand how my company operates. Like most of you I have a vision of where I want to go. Currently I am a long way from where I see the business in the future. But I have to know where I am now before I can work toward the goals I have set.

Most businesses can afford a basic computer and accounting software is relatively inexpensive. Have your accountant set up the basic categories of your business and start preparing and analyzing your own reports. Many systems will allow you to test a "what if" scenario. What would happen if I did this?

The Last Word On Cash Flow

If you are a small or home based business it is well worth the money to sit down with an accountant and have him set up a simple accounting system for you.

My first system was a series of envelopes. Seventeen in all as I remember. There were things like; Accounts Payable, Accounts Receivable, Cost of Sales, Gas and Auto, Office Expenses, Inventory, Advertising and so on.

This procedure isn't expensive but can save big money in the long run. As your business grows, you are going to have to make some hard decisions. Some of them may be risky and costly. Knowing the financial position may not make the decision less risky but may make it easier to make.

For more help, buy my book, or visit the Small Business Administration website at:


You can also request a free copy of "The Resource Directory for Small Business Management, " a listing of for-sale publications and video tapes from your local SBA office.

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