There are very good reasons for business owners to stay on top of their cash flow, says Robert W. Duron, CPA, associate professor at Husson University’s School of Accounting. A business with well-managed cash flow runs more smoothly and finds it easier to establish and maintain the kind of credit rating required to secure financing for future growth and expansion. Perhaps most important, managing cash flow effectively helps you avoid the kind of surprises that can result in a sudden and unexpected cash crisis, he says.

 

In its basic form, cash flow is simply the total inflows of cash from operations, loans, and capital investments, minus the total outflows from operations, loan repayments, capital expenditures, and equity distributions, says Greg Wank, a partner at accounting firm Anchin, Block & Anchin. The basic cash flow formula is:

 

Beginning cash + Cash receipts – Cash disbursements = Ending cash

 

This can be broken down further into operating cash flow (solely from the buying and selling of goods and services the company is in business to provide), investing cash flow (capital expenditures and other cash flows from long-term investments), and financing cash flow (from debt and equity activity).

 

Cash flow modeling typically is fairly straightforward, but the information it provides is only valuable to your business if you use the right information and input it accurately, warns Doug Mitchell, a partner in Hardesty LLC, which provides on-demand financial management executives to businesses. For example, make sure the “Beginning cash” amount you use in the formula above agrees with the amounts that appear on the statements for your business bank accounts. For the “Cash disbursements” amount, make sure you include:

  • All accounts payables
  • Vendor invoices which have not been received but for which the service or product has been delivered
  • Payroll
  • Loan and/or lease interest and principal payments
  • Capital expenditures

 

To help ensure greater accuracy in the “Cash receipts” variable of the formula, Mitchell suggests organizing them into product and/or service categories, then checking off each category as you add them up. So your formula for determining cash receipts for each individual category is:

(Product/service item) x (quantity sold) x (price) = Cash receipts per category

 

Aron Susman, CPA, is a co-founder of TheSquareFoot, an online platform for commercial real estate leasing. He credits careful cash flow management with enabling his business to expand into three cities since its launch in 2011. “I think businesses overemphasize revenue and do not stress enough about cash flow,” he says. “Revenue is great, but if you are not collecting—and thus have huge accounts receivable—those revenues do not matter. I do not think you can compete in today’s environment if you are not monitoring your cash flow.”


Duron stresses that cash flow management must include a forward-looking perspective to be strategically useful. Start with beginning cash and then estimate both cash receipts and disbursements for a set planning period, he suggests, and he seconds Mitchell’s observation on the importance of including credit terms in those projections. “Sales made in one month may not be collected until one or more months after the sale,” he says. “Over time, a business owner can forecast with surprising accuracy what percentage of sales and/or purchases will be received or paid in a given month.”

 

Mitchell says one of the biggest mistakes owners of growing companies make is underestimating the amount of working capital they need. “Most entrepreneurs are optimists and tend to overstate revenues and understate expenses and surprises,” he observes. Other common mistakes he sees in his practice include:

  • Not linking the cash flow model with the P&L or balance sheet
  • Not linking the cash flow model to the sales forecast
  • Not allowing an extra margin to absorb a receipts shortfall
  • Not balancing/reconciling bank accounts on a routine, daily basis
  • Not monitoring payment patterns of key customer accounts
  • Insufficient attention paid to days sales outstanding (DSO) of smaller customers and to significant past due balances

 

Cash Flow Tools


Most accounting software programs include a variety of cash flow management and charting tools, and many additional resources are available online. Robert W. Duron, CPA, associate professor at Husson University’s School of Accounting, suggests:

 

Aron Susman, CPA, a co-founder of TheSquareFoot, suggests the SBA site is also a good source for answers to common questions about cash flow management. Check out the Managing Small Business Cash Flow – Answers to 10 Commonly Asked Questions blog post and the projected cash flow calculator, in particular. 


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