An article or tutorial on planning and managing a business's cash flow.
Planning and managing a business’s cash flow
This purpose of this article is to guides the business owner in drafting a Cash Flow Forecast and using it for budgeting, decision making and financial planning throughout the business process.
Projected Cash Flow.
If the profit projection is the heart of a business plan, cash flow is the blood. Businesses fail because they cannot pay their bills and/or replenish stock levels. Every part of your business plan is important, but none of it means a thing if you run out of cash.
The point of this worksheet is to plan how much you need before start-up, for preliminary expenses, operating expenses, and reserves. You should keep updating it and using it afterward. It will enable you to foresee cash shortfalls in time to do something about them—perhaps cut expenses, or perhaps negotiate a loan. But it is crucial not to be taken by surprise.
There is no great trick to preparing it: The cash-flow projection is just a forward look at your checking account. For each item, determine when you actually expect to receive cash from sales or when you will have to make payments.
You should track essential operating data, which is not necessarily part of cash flow but allows you to track items that have a heavy impact on cash flow, such as sales and inventory purchases. Your cash flow will show you whether your working capital is adequate. Clearly, if your projected cash balance is ever negative, you will need more start-up capital or an overdraft arrangement at the bank. This plan will also predict just when and how much you will need to borrow. Explain your assumptions; especially those that make the cash flow differ from the Profit and Loss Projection. For example, if you make a sale in month one, when do you collect the cash? When you buy inventory or materials, do you pay in advance, upon delivery, or much later? How will this affect cash flow?
Are some expenses payable in advance? When? Are there irregular outlays, such as bi-monthly VAT, maintenance and repairs, or seasonal inventory build up that should be budgeted for? Loan repayments, equipment purchases, and owner's drawings usually do not show on profit and loss statements, but they definitely do remove cash. Be sure to include them. And of course, depreciation does not appear in the cash flow at all because you never physically pay for it out, it’s a cashless expense.
Planning the cash flow is best as opposed to not doing so and suffering the adverse consequences.
Drafting a cash flow projection for a financial year or period can quite easily be done as displayed in the Cash Flow Planning Template below. Click on the link to open the template.
"Cash Flow Planning Template"
The above Cash Flow Forecast must be used in the future to track your Actual Cash Flow to your Projected Cash Flow; otherwise you will never know where you stand in terms of financial planning and cash management.
Other topics covered in this series of articles.
Record keeping and basic Bookkeeping, common mistakes made when costing & pricing products, steps to successful budgeting, the ten most common mistakes made when budgeting, Cash Book entries, monthly Bank Reconciliation, opening day balance sheet, projected Cash Flow forecasting, costing and pricing, market research and strategic planning, drafting the business plan and the planning phase, implementing the business plan, secrets to having a successful and profitable business.
Vaughan, an accountant with 35 years experience, writer of books and articles to help business owners improve the management of their businesses.
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