Can I make payroll this month? Do I have enough cash to fund my business’ growth? How much money do I have left to pay myself? If you find yourself asking these questions, you are not alone. Cash flow is an important step to running your small business. Without cash, your company (big and small companies alike) can not last for very long. Learning to manage, budget, and track your cash flow is an important step for small business owners. It is possible for companies to report a positive income while having negative cash flow. Which is why, contrary to popular belief, cash flow troubles are usually a businesses downfall, not profitability issues.
Creating a cash flow budget, also known as a cash flow projection, is a great way to manage your small businesses cash flow. The purpose of your cash flow budget is to track and project the cash inflows and cash outflows over a specific period of time. Most businesses will track their cash flow on a monthly basis, but it is not uncommon to see daily or weekly projections. The first step is to determine how far in the future you should be forecasting. As you know from creating your Profit and Loss Budget, projecting your future sales and expenses can be tricky because of the many uncertainties and unforeseen events that exist. The general rule of thumb is to budget your business’ cash flow for 6 months in advance. This provides the business owner time to look into the future and plan for future events.
Follow the steps listed below and you will have a cash flow budget for your business in no time.
- Prepare a Profit and Loss Budget (also known as a Sales Forecast).
The easiest way to do this is to use your previous year’s financial statements and budget from there. If this is the first year you are in business it will be a little trickier, but not impossible. Research your industry, your competition, and economic factors and create a profit and loss budget for your business.
- Forecast Your Cash Inflows
Working from your Profit and Loss Budget, determine how much money you plan to collect each month based on your monthly invoices. Pay special attention to your billing terms. If your invoices are due in 30 days, but your customers typically take 45 days to pay, use this time frame for your cash flow budget. This means January invoices will most likely be collected in March, not in February. If you offer discounts for customers paying early and three-quarters of your customers take advantage of these discounts, make sure to use these figures on your cash flow budget. For example, a 5% discount if the invoice is paid in full in 10 days, results in a receipt amount of $95.
- Forecast Your Cash Outflows
Again, working from your Profit and Loss Budget, look at your expenses and enter them on your cash flow budget. Think about other cash disbursements that might affect the months you are budgeting for as well. Figure out what expenses will be paid and when. Some items to consider are rent, payroll, leases, office supplies, insurance, fixed asset purchases, etc. Don’t include your non-cash expenses (depreciation and amortization). Even though they show up as an expense on your income statement, they are not cash outflows.
- Cash Inflows – Cash Outflows = Net Cash Flow
Now you have the tools to start managing and predicting your company’s cash flow. You can predict when your cash flows will be positive and also forecast for gaps in your cash flow (cash outflows exceed your cash inflows). This allows you to plan for the future and make any necessary arrangements or adjustments before you find yourself in cash flow troubles.
Here’s a great Cash Flow Budget Template courtesy of the U.S. Small Business Administration (www.sba.gov).
Next week I will give you tips on how to effectively use your cash flow budget, things to watch for, and how to plan for future events.
Michelle is the owner of Trailhead Accounting Solutions CPA, LLC, an Erie, CO based CPA firm focused on providing small and mid-sized businesses with day-to-day accounting, bookkeeping, and business solutions. Michelle is a CFO turned consultant who loves working with small businesses and entrepreneurs. When she’s not crunching numbers, she can be found hiking, remote camping, gardening, quilting, and hanging out with her family.