Cash flow – The business lifeline
All business owners know what cash flow is – if not technically, then emotionally. Nevertheless, it’s worthwhile to approach this subject from the very beginning because it is central to business success.
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.”
Along with some other financial basics, cash flow also can 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.
How to 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. Often, 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 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 components. 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 any 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 this is a positive figure) 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. The table illustrates a basic way to track cash flow.
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 advisers. 
Warren Rutherford founded Rutherford Advisors Inc. in 1997, and has more than 26 years experience providing management advisory services to business and government. He also performs market research for businesses and is an Associate Reseller with MapInfo Corporation. He can be reached at rutherfw@comcast.net.
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