Problems with cash flow are a killer in small business. I would imagine that if you asked 10 business owners what their greatest concern is, 7 of them would say Cash Flow. If you asked the same 10 what they think causes most business failures, you will also hear some version of, “not enough money – not enough cash.”
Even though most would answer this way, very few of them have a good reliable way to project and manage cash flow.
Part of the problem is that Cash flow statements while helpful are historical reports – they are lagging indicators. How do you create a forward-looking system to anticipate cash flows? Well you need to set up a projected cash flow tool in a spreadsheet as follows. Set it up so that you can plug in your projections into the foreseeable future.
Projected Cash Receipts
– Projected Cash Expenditures for COGS
– Projected Cash Expenditures for Overhead
= Change in Cash from Operations
+Projected Change in Cash from Investment Activities (including capital expenditures for assets: +/-)
+ Projected Change in Cash from Financing Activities (including paid-in capital from owners/investors, distributions & principal payments: +/-)
= Total Projected Change in Cash (+/-)
+ previous month’s cash balance
= projected months cash balance
Be careful to use conservatism, round down on projected revenues and round up on expenses.
Other things to look at are, your quick ratio, your debt to equity ratio and your Days Cash figure. Days cash is your liquid assets divided by average daily overhead. I hope this helps you! To learn more about this enterprise skill, check out Business Kung Fu.