Cash Flow Analysis

Sounds scary doesn’t it? And yet, if you don’t know what cash you have available to support operations, how do you make good decisions? Hopefully you are not one of those people who think that all the money in the checking account belongs to you…or, to use an old joke, not one of those people who can’t be broke because you still have checks in your check book.


If you think about it, and I do…a lot, cash coming into and going out in a continuing flow is like the life blood of your business. If too much leaks out and isn’t replaced, you may end up dead! So being able to know where you stand with cash is essential if you want to have a thriving business. In fact it is one of three things that you must do if you want your business to be successful. Those three things are:


1 – Increase cash (and understand your business’s cash flow)

2 – Decrease debt

3 – Generate Net Profits


I can’t honestly take credit for so succinctly enumerating these three items. This concept came from a great book call “The Goal” which you will find in our favorite books listing. I will get into what it takes to employ all three of these in your business in later write-ups. For now, let’s just concentrate on cash. Let me start by giving you some real life examples of what bad cash flow is.


A while back I was called in to work with a contractor who needed help with his business. When I arrived on site, The owner and I sat down to review his particular needs and one of the first things he said to me was that he was afraid he was going to have to shut his doors and let his people go. When I asked him why, he replied that he didn’t think he had enough money in his checking account to cover the next weeks payroll. I had already reviewed his most recent income statement and found that his business had strong sales; labor and expenses were in line and he was generating net profits, so where was his cash? The answer was on his balance sheet. He was getting ready to call it quits with over a million dollars sitting in accounts receivable. Bad cash flow.

A more recent client called me in because he was having problems paying the company’s bills and couldn’t understand why. When I looked over the financial reporting for the company I discovered that the owner had been taking money out of the company in the form of owner distributions to finance things like a new car, a remodel on their house, tuition for the kids school and so on. Bad cash flow.


In both of these cases, if the owners of these businesses had been doing some simple cash flow analysis and planning on a weekly basis, they would have seen trouble coming far enough in advance to do something about it.


So let me answer some of the obvious questions that may be floating through your mind at this point.


I’m not like the people in the examples, is cash flow analysis and planning that important?


In a word…YES. Everyone should be aware of their operational cash position on a daily or weekly basis. Without cash flow planning, and planned cash reserves to make sure you can stay in business during lean sales times, you could easily be one of the people in my examples.


Isn’t this something my accountant should be doing?


Actually most of you use accountants for tax preparation and that’s about it. Most good accountants can do cash flow analysis and planning, but you would be paying a pretty penny for something you can learn to do yourself. In my humble opinion, not a good use of your cash…in other words…Bad cash flow.


OK…So how do I get a handle on the cash flow for my business?


Excellent question. You need to get a few things together to get started.

1 – your starting total cash in the bank for the period to be forecast.

This will be your available balance for the day starting your forecast period.

2 – Your budgeted sales projections by week.

You do have a budget, don’t you? If not, you need to get one done. If you need help, let me know.

3 – Your budgeted collections activity on existing A/R for the start of the period, if any.

If you have accounts receivable at the start of the analysis period, you should have a budget or plan for the collection of that money each week.

4 – Your budgeted payroll to get the sales projected in #1.

This can be planned based on how your company pays its employees…weekly, bi-weekly, twice a month.

5 – Your planned expenditures for accounts payable by week and month.

Be sure to include any applicable sales or payroll taxes, credit card fees or other expenses in your payables plan.


This would be enough for a simple cash flow plan. More complex cash flow may also include any loan payments that need to be made, or may break out specific expenses differently.


Putting it together

Pretty simple really. Take your staring available cash (cash in the bank less any outstanding checks), add in the projected sales and collections for the week, subtract out any planned expenditures such as payroll, AP, taxes and so on. That will give you the available cash at the end of the week. This in turn is the starting cash for the next week. We can then repeat the process for each week of the projection period. If in doing this you discover that your cash goes negative at any point in the projection period, you now have advance warning of what may happen if your projection hold true. Then the question is what do you do about it.


By the way, a cash flow projection, like a budget, is a living part of your business and needs to be updated with real figures as they become available. This makes your projection much more accurate and also gives you a historical document of the performance of the company that you can use for future planning.


For help with cash flow planning, budgeting and a whole lot more, contact us about our fractional business adviser plan.


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