Cash Flow Statement

Even a profitable business can go bankrupt if its cash flow isn't managed properly. Whether you're figuring out how to create a cash flow statement, how to improve your business's cash flow, or still learning what cash flow even is, this article is for you. Last week we looked at how to calculate cash flow. This week we will look at the actual cash flow statement and how to monitor it.

How often should I review and revise my cash flow forecast?

Forecasting cash flow is important because it will allow a business to identify future problems with cash. It will show them when they may expect a shortage and thus, allow them to make plans in advance to ensure this doesn't impact day-to-day business activities.

If you're just getting started and cash is tight, it's a good idea to have a solid understanding of when you will need to make pay-outs. In this scenario, consider forecasting your cash flow on a daily basis.

Otherwise, most companies tend to forecast their cash flow on a weekly or monthly basis.

How do I manage my cash flow?

Now you need to learn to manage your cash flow. As we said above, good cash flow management will help you succeed, while poor cash flow management could cripple your business.

Regardless of whether you've been operating for a year or for five, there are always things you can do better.

With that in mind, here are a few tips on monitoring your cash flow and on projecting and meeting cash flow needs.

How to make monitoring your cash flow easy:

• Keep a daily record of incoming and outgoing cash
• Deposit any checks received on a daily basis
• Use numbered cash receipts and account for all of them
• Use numbered checks for disbursements
• Send customer invoices within two days
• Collect receivables within two months

To encourage those that owe you money to pay on a timely basis, consider offering discounts; taking deposits immediately as a sale is made, and performing credit checks on those that don't pay with cash.

Likewise, when it's your turn to pay up, take full advantage of a creditor's payment terms. Don't pay for something 20 days before you should. Rather, be timely and set up an electronic transfer. Don't forget to take advantage of any discounts creditors offer you as well! However, be wary of making payments too early as it will make it hard to forecast cash flow and will make cash flow unpredictable.

How to project your cash flow needs and then meet those needs:

• Anticipate payroll
• Preempt outstanding debt payments
• Set aside money for emergencies
• Set aside money to allow for growth
• Use short-term financing when necessary
• Arrange for a line of credit with a bank before you are short on cash

What to watch out for So that you're not surprised by the state of your finances,

it's good to consider where your cash will go when you get started, and where most of it will go on a monthly basis.

1. Factor in your start-up costs

Every business will have initial start-up costs. Perhaps it's a lease on an office, or marketing expenses, or initial inventory purchases, or hiring the services of a contractor. While you may have to take this in stride for a year or two, you should also allocate an amount of cash to these early expenses. It's best to have this in mind before you start your business.

2. Keep an eye on inventory and receivables

As with your initial start-up expenses, as you grow, so too will your need for inventory, and your receivables. If at all possible, set aside cash to finance these things. Or, keep a close watch on them.

3. Rapid growth can put you in a tight spot

As you grow, you will likely need more cash on hand to finance inventory, receivables, marketing expenses and other large acquisitions. This may result in a negative cash flow, which, if not managed carefully over time, could eventually force you into bankruptcy. Many a rapid growing business has been unable to cope with growing demands and has had to close shop due to poor cash management.

Be organized, but accept that you're human

Occasionally, you may not be able to make a payment due to negative cash flow. Ideally, you will have predicted this in advance, but if not, accept the fact that you really cannot predict the future and take preventative measures.

Banks are far more willing to lend to those people that know months in advance they may have a cash shortage. This makes you look financially responsible. Plus, if you don't end up having a shortage, you don't need to take up on the loan you were offered, it's just a nice safety net to have in place.

Also, consider turning to your suppliers. Given that you've got an active working relationship with them, they will be the ones most invested in your success. They may be able to offer you a short-term loan.

In general, keep an eye on your cash flow and make forecasting a habit. Any time you see expenses exceeding incoming cash, take this as a sign to be frugal.

An archive of SBDC Business Reports can be found at http://www.grantcountybeat.com/index.php/archived-items.

Western New Mexico University's Small Business Development Center offers assistance to entrepreneurs who are starting a business or wanting to expand an existing business. These services are available at no cost. Call 538-6320 for an appointment with a business advisor, or email sbdc@wnmu.edu. The SBDC office is located in Watts Hall at 500 18th Street, at the intersection of Swan and Silver Heights Blvd. An appointment at your office is available by request. More information may be found at www.nmsbdc.com/silvercity/index.html.

Contact the SBDC office for more information about these events. 

• October 7 - "How to Build Your Credit"
• October 8 - Advertising Your Business on Facebook"