Small Business - Cash Flow

[Paul Carcone]

Another excerpt...as promised...this time on Small Business Cash Flow


Cash flow forecasting is highly important when starting up a new business, whether the time frame set is short term or long term the cash flow forecast will be the model of a company or asset’s future financial liquidity. It is more important to forecast the likely cash requirements than the company profitability. The cash flow is the company’s total bank balances including the sales and costs.

Profit within a company is not a guarantee that the company can develop or even survive. A lot of new businesses fail due to lack of cash flow. Cash inflows and outflows do not always relate to the sales and costs which in turn produce or lose profits. For example if a sale is made and goods delivered but the customer was given credit, the payment is therefore deferred. The cash outflow must also include things such as payment to suppliers, staff etc and so the cash inflow must at least meet the outflow to break even. If a cash flow forecast has not been produced the reports may show the company is in profit but unsettled or un-cashed payments may see the business experience a cash shortfall.

It is a good idea to produce the cash flow forecast for approximately a year ahead concentrating on weekly forecasts for the initial three months. During this period you will begin to realize the differences between the timing of profit and cash flow. You may find that the reported profit for month one does not materialize until month three, this will leave a serious cash shortage for month one.

The normal cash inflows will be from sales, loans and other income such as interest earned. Outflows will be payments to suppliers, staff, loan repayments etc. The net cash flow is the difference between the inflow and the outflow within a given period, repetitive positive net flow will highlight the potential success of the business and similarly regular negative net flow will highlight the weak spots of the business and determine whether it can survive.

It is essential to analyse in detail the timings of all payments in and out of the company. This will prepare you for any bank funding requirements you may need. Cash flow projections should be regularly updated and thoroughly checked. Lack of foresight, knowledge and even over excessive optimism can result in disastrous consequences. You should thoroughly research all options and be aware of any hidden charges or costs, keep your expectations realistic and don’t get carried away with the prospects of becoming a millionaire over night.

The cash flow forecast should be used as a management tool to control and improve the businesses cash position.

[katealpha]

This is useful thanks. The number one thing I have learned from running a small business is that cash flow is completely vital and has to be actively managed.