Cash Flow Problems Cause Bankruptcy

August 3, 2013 | Roger and Susie Engelau

Have you had to postpone an important capital outlay? Not sure you’re going to make payroll? Cash flow becoming a nightmare?

Cash flow problems cause bankruptcy. It’s the most troubling issue for business owners small and large. When sales and revenue go down but overhead stays the same, it’s a nightmare when you’ve got people demanding payment or you’ve even started going into personal debt to put cash into your business.

Over the years I’ve shared many strategies that have helped business owners achieve strong steady cash flow. Many are fast-acting, quick hits that I’ll share with you in this series on cash flow but I’d like to start with the foundation strategy…You can keep your cash flow consistent and positive by making a Cash Flow Budget and then managing to it.

A Cash Flow Budget is a projection of your business’s cash inflows and outflows on a daily, weekly, or monthly basis, usually done over a 6-month period. The purpose is to predict your business’ ability to take in more cash than it pays out giving you an indication of your ability for expansion, to pay bills, or simply to support yourself. It can predict cash flow gaps—periods when cash outflows exceed inflows—so you can take steps to ensure that the gaps are closed, or at least narrowed…steps like lowering your investment in accounts receivable or inventory, or looking to outside sources of cash, such as a short-term loan.

How to make a Cash Flow Budget

The first step is to project your cash inflows, i.e. forecast your sales. Using the previous year’s sales is a good starting point.

Next, project your cash outflows. Classify each of your business expenses into one of four possible categories of cash outflows:

  1. Cost of Goods Sold — A cash outflow falls under this category if it’s for the purchase of inventory items resold to your customers. It also includes the costs of direct labor and inventory items used to manufacture the end product. If your business is a retail business, your largest cash outflow is probably for the purchase of resale items. If you’re in manufacturing, a large portion is likely the purchase of raw materials. If you have a service business, only a small amount of your cash outflow may fall under this category.
  2. Operating Expenses (Overhead) – Includes payroll, payroll taxes, utilities, rent, insurance, repairs, and indirect labor costs (management, sales, administrative staff, etc). If the cash outflow doesn’t fit in one of the other three categories, it’s probably an operating expense.
  3. Major Purchases – Typically for expansions or upgrades for property, equipment, vehicles, computers, or other office equipment.
  4. Debt Payments

The final step is putting together your projected cash inflows and outflows to come up with your cash flow bottom line. In its basic form, it looks like Beginning Cash Balance + Projected Cash Inflows – Projected Cash Outflows = Your Cash Flow Bottom Line (the ending cash balance).

The ending cash balance for the first month becomes the second month’s beginning cash balance. The second month’s cash flow bottom line is determined by combining the beginning cash balance with the second month’s anticipated cash inflows and cash outflows. The ending cash balance for the second month then becomes the third month’s beginning cash balance and so on.

A positive cash flow bottom line indicates that your business has a cash surplus at the end of the month. A negative cash flow means that you’ll either need to cut back on your cost of goods or operating expenses, postpone upgrades or expansions, or negotiate a lower loan payment or it means you need a cash infusion through increased sales, a loan, or other source.

Now you know what your current cash position is and you know what the future holds. A Cash Flow Budget puts you in control and gives you the confidence to act decisively.

If you’d like to get more of my cash flow strategies, you’re invited to my FREE webinar, coming up on August 29 at 11:30 am EST, to help you learn EXACTLY what you need to do to implement a cash flow strategy that works!

Register NOW The CEO’S Guide to Strong and Steady Cash Flow

In addition to learning how to make a 6-month cash flow budget that’ll give you the confidence to make that equipment upgrade, in just 60 minutes you will…

  • Get my 7 fast-acting, sure-fire ways to find and reduce unnecessary expenses while you watch your net profit skyrocket
  • Find out how to make more $ from each customer… this formula is the most important customer strategy anyone can learn
  • Discover how to put an end to “rollercoaster-income” once and for all
  • Find out the 1 amazingly simple, easy-to-do move that’s increased revenues in 90% of my clients’ businesses—overnight!
  • Learn what processes to put in place to make collections simple and effective and save 5 hours a week in time spent trying to collect accounts payable

Don’t miss it!

Register NOW The CEO’S Guide to Strong and Steady Cash Flow

To your success, Coach Roger Engelau