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How To Make Cash Flow - Your Business Lifeline

Warren Rutherford

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All business owners know what cash flow is - if not technically, then emotionally (is there ever enough). Nevertheless, it is worthwhile to approach this subject from the very beginning because it is central to business success.

What is it?

A useful way to think about cash flow is to view your business as a living organism. Cash is the nutrient that runs through its arteries and veins. The brain might be viewed as the product or service, the heart as the marketing, and the stomach as the finances; at which point it all begins to get a little messy. If you don't have enough cash flow, though, rest assured that the living organism turns into a skeleton, slowly decaying from insufficient nutrients.

Cash is Fact!

The essential point about cash flow that is often overlooked is that it is different from profit and, for a growing business, much more important. Many analysts have opined: “Profit is an opinion, cash is fact. " It's possible to run out of cash and go broke even if you have many purchase orders. Why? Because you aren't being paid in a timely fashion (a subject for another article).

This problem is common to a multitude of companies, large and small. For instance, let's assume your small business has just sold 100 units of a big-ticket item (a telephone answering system for $2,000 per unit) to two medium-sized manufacturers, realizing sales of $ 200,000. The orders were there, but the cash came in as late as three months after the salesperson received a commitment to buy, because each manufacturer's purchase order might take two months to be executed and the bills paid another one month after that. As the owner, you may have had to skip a few paydays, negotiate with suppliers to keep essential products and services coming, and otherwise struggle to stay afloat until the cash came in. Things were so tight that you found yourself monitoring cash flow on a daily basis. Sound all too familiar?

Along with some other financial basics, cash flow can also be used as a planning tool. By monitoring cash flow on a regular basis as cash comes in and goes out, you'll see a pattern that enables you to plan expenditures (and get serious about monitoring your receivables).

This becomes very important, especially if you want to expand or go after new markets. You can quickly calculate the effect of such actions on cash flow and determine whether you'll need to seek a bank loan or other financing or whether you can support the new activity from internally generated funds.

So let's start the process!

Calculating Expenses (Disbursements)

Expenses are usually considered as fixed and variable. Fixed expenses are such things as salaries, rent, and debt service - items you're committed to for the long term and can't easily change. Oftentimes, depending on the nature of the business, your accounts payables could be considered a fixed expense. Variable expenses include advertising, office supplies, promotion, insurance, consulting, and other such expenses that can be easily increased or decreased from month to month. A good place to start with this calculation is reviewing your last several years of historical financial data. Calculate your monthly fixed expenses. Calculate the months in which your variable expenses usually occur. Total them for a month-by-month bottom line expense total projection.

Calculating Income (Receipts)

Calculate the income you expect to receive during each month from your customers. As your accounts receivables these are your most important revenue component. Being too optimistic about the timing of their receipt can lead you into a cash crunch. Be realistic. Review your historical financial data to calculate the average aging of your receivables. Then include other income from royalties, commissions, interest, and so forth.

Calculating cash flow

Begin with the cash on hand at the beginning of the month. List your income expected (your cash receipts). List your projected disbursements - fixed and variable (your cash requirements).

Add your cash on hand at the beginning of the month and your cash receipts; then subtract your cash disbursements. The balance remaining (hopefully a positive) is the amount left in your checking account (if the amount is negative, let's hope you have overdraft protection). List the amount in your savings account. Add the checking and savings account amounts. The result is the amount of cash available at the end of the month.

The cash amount remaining at the end of the month then becomes your beginning cash balance for the next month. Cash flow is the difference between what you started with and ended with. Simple enough.

Quite simply, cash flow is a record of cash available at different points in times. At a minimum it should be monitored monthly, however, weekly monitoring is more advisable for a growing business.

A cash flow report seems complicated at first glance, but it's very simple, and it's extremely important as a planning tool. Business owners seeking to understand and appreciate the impact of changes that the three components of total cash flow - operating, investing, and financing can have on operating performance should consult their professional business advisors.


Warren J. Rutherford President of Rutherford Advisors Inc. is an Accredited Associate, IIB, a CMT Accredited Senior Mentor, and a BNI Assistant Director in the SE Mass/RI Region. Contact him to learn more about cash flow management. He provides business advisory and mentoring services to small and medium-sized business, and performs market research for businesses. He can be reached at Copyright 2008, Rutherford Advisors, Inc


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