There’s an old expression in business that “cash is king” and it’s so true. Cash is the lifeblood of any business because you can’t operate without it. In recent years, cash flow has consistently been listed as one of the top reasons why businesses fail, although that may be improving according to The Gallup Economy poll results posted in October of 2011.
Gallup reported that cash flow had dropped to 6th on its list when those polled were asked, “What do you think is the most important problem facing small business owners like you today?” (http://www.gallup.com/poll/150287/gov-regulations-top-small-business-owners-problem-list.aspx).
This is encouraging news but the fact remains that cash is critical for business survival and, unless you know how much you have to work with, it’s hard to plan for the future or even operate on a day-to-day basis. A great tool for understanding how cash flows in and out of your business is the short-term cash flow projection.
Creating basic projections isn’t terribly complicated — it’s simply a step-by-step process. We suggest projecting out at least six weeks so you’ll know what to expect. The goal here isn’t to be 100% accurate but to use it as a tool to identify when cash flow problems might occur and how you might be able to deal with them.
To get started, here are steps for creating a one-week cash flow projection:
Step one: Start with the cash you have on hand Monday morning (you will be projecting the week from Monday through Sunday).
Step two: Predict your cash receipts for the week by looking at what you might collect from accounts receivable, cash, or by credit card. A good way of doing this is by customer name for large receivables and then estimating smaller receivables that might come in. If you only have a lot of small receivables, estimate how much of those balances will be collected by the end of the week. Also estimate any miscellaneous cash that might come in from other sources.
Step three: Now look at the cash that will be going out and begin with your most important expenses. Payroll and payroll taxes should come first. Then include things like vendors, bills related to space, and other expenses that will be paid during the week and are critical to operations. It’s a good idea to group things together by type, such as payments to vendors, payroll items, taxes, health insurance, supplies, professional fees and space costs. Also deduct debt payments on lines of credit, term notes and mortgages that are due this week.
Step Five: Take Monday’s beginning cash, plus estimated total cash receipts and subtract total cash disbursements. This is basic arithmetic that should give you a good idea of the total cash you’ll end up with at the end of the week. That number now becomes the next week’s starting point. From there you can begin projecting the next six weeks.
Running cash flow projections on a regular basis has a number of advantages. It keeps you informed and grounded if you’re tight on money. It helps prevent unwelcome surprises by keeping you in touch with upcoming expenditures. It serves as a type of budget for your business and lets you know where money is going.
Projections can be easily set up in an Excel spreadsheet. If you’re not proficient with computers or Excel, you can get help from an accountant, bookkeeper or even an advanced business student through a local college.
A word of caution, though — be realistic. Projections are a valuable tool when they’re based on your actual circumstances. It may be fun to look to the distant future and what your hopes are for your business, but use actual numbers when planning for the near future and your day-to-day operations.
If you’re not already running cash flow projections, now is a good time to start. It’s a simple tool that has significant advantages when used regularly. You’ll be much more in tune with your company’s overall health if you’re keeping an eye on its lifeblood — good old King Cash!
Laddie and Judy Blaskowski are partners in several businesses, including BusinessTruths Consulting. They are authors of The Step Dynamic: A Powerful Strategy for Successfully Growing Your Business. Judy@BusinessTruths.com.