Getting Consistent Positive Cash Flow

January 16, 2015 | Roger and Susie Engelau

Have you had to postpone an important capital outlay? Need an equipment upgrade?  Not sure you’re going to make payroll?

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 putting personal cash into your business.

Start with a cash flow budget

Over the years I’ve implemented many different strategies that have helped my 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 Cost of Goods Sold.

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 – put 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 1st month becomes the 2nd month’s beginning cash balance. Determine the 2nd month’s cash flow bottom line by combining the beginning cash balance with the 2nd month’s anticipated cash inflows and cash outflows. The ending cash balance for the 2nd month then becomes the 3rd 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 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 like from increased sales or a loan.

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.

Reducing expenses and the time it takes to get your money for services rendered are two ways to get your cash flow under control. Check in next week for fast-acting, sure-fire ways to positive cash flow.