To
get a handle on the financial outlook for your company, start
with your budget, which projects profits or losses by looking
expected income and expenses. (If you need a hand with budgeting,
check out our stories on the basics
of financial planning for business owners.) For our purposes, the most important use of the budget
is that its numbers can be used to help anticipate cash flow needs,
which is essential to keeping a business operating smoothly.
The basic elements of cash flow
are:
- Starting cash -- This
is your starting balance -- what you have on hand at the beginning
of each month.
- Cash in -- This is
all cash received during the month, including sales, paid receivables,
interest or cash from sales of assets or stock.
- Cash out -- Includes
all fixed and variable expenses.
- Ending cash -- This is your ending balance. Add starting cash to cash in for total cash, then subtract cash out.
Here is an example of how you measure cash flow by
subtracting your monthly ending balance from your starting balance.
| Month 1 | Month 2 | |
|
Starting cash
|
$3,500
|
$3,000
|
|
Cash in
|
||
|
Sales
|
$2,500
|
|
|
Receivables paid
|
$500
|
|
|
Other
|
$0
|
|
|
Total in
|
$3,000
|
|
|
Cash out
|
||
|
Rent
|
$1,500
|
|
|
Payroll
|
$1,500
|
|
|
Owner's draw
|
$250
|
|
|
Supplies
|
$250
|
|
|
Total cash out
|
$3,500
|
|
|
Ending cash
|
$3,000
|
|
|
Change in flow
|
($500)
|
Let's say you started the month with $3,500. You brought
in $2,500 in sales and $500 in paid receivables. You paid out $1,500
in rent, $250 in supplies, and $1,750 for wages and owner's draw
-- for a total of $3,500 in expenses. Your ending balance is $3,000.
While you did show some sales, your monthly cash flow
would be -$500. To survive, you want positive cash flow, which means
taking in more than you are spending. Positive cash flow gives you
forward motion to build and grow.
Even a small lag in sales or an outstanding bill can
make a dramatic impact on cash flow, but you won't know that without
your cash flow budget. At the end of every month, compare actual
business sales with estimated cash flow and hold them up against
your master budget.
If they are out of sync, consider the cause. Maybe
you didn't factor in the need to hire summer vacation replacement
help or the jump in paper prices for your printing business. Cut
back on cash out where you can, and adjust monthly cash flow projections
to more realistically meet your needs.
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