Essential Tools to Maximize Cash Flow

By Ken Kaufman on 23 November 2011 (Updated 28 November 2011) 0 comments
Photo: DNY59

Cash is King. Cash is your business’ life-blood. Happiness is positive cash flow. So many clichés about cash, yet so many businesses fail to maximize it. Deploying the cash flow formula to determine your cash flow projection will empower your business to use this precious resource more effectively.

Start with a Beginning Balance

A proper cash flow calculation starts with determining the beginning balance of your cash accounts. This is not just your collective bank account balances. Subtract any outstanding checks or other charges and add any uncleared deposits to arrive at your actual balance. Hopefully, it’s positive.

Build a Cash Flow Projection

Next, complete a cash flow projection organized on a week-by-week basis for at least the next 13 weeks, or quarter, clarifying the most effective use of resources in the short-term:

    Do you need your cash to make payroll, or can you use it on more supplies and equipment?

    Should you pay down debt or let your bank balance grow for a while?

A cash flow projection answers these and many other questions.

  1. Account for Income. The first step to project future cash flow is to understand what cash is going to come in from customers during the next 13 weeks. Review your accounts receivable and other transactions that will turn to cash during each week. Then project your sales for the next quarter and when each of those sales will turn into cash in your bank account to complete your projection of cash inflows from customers. You’ll also need to evaluate any other cash inflows, such as from a loan, sale of an asset, sale of stock and so on. Total these inflows to arrive at the total weekly cash into your business.
  2. Account for Fixed and Contract Payments. The second step of an accurate cash flow forecast is an accounting of all of the fixed and contract payments scheduled for the next 13 weeks. This includes the fixed portion of your payroll, payroll taxes, benefits, insurance, rent, loan payments, advertising and all other bills that are or will become due. It is often best to list these by vendor or payee name. If you keep track of your bills and payments in an accounting system, then often a print-out of your current accounts payable is a good place to start.
  3. Account for Variable Expenses. Step three calculates all of your variable expenses for each week of the next quarter—the outflows that vary based on your sales volume. Some of this information will come from your accounts payable, and some will be estimated based on the sales projections completed during step one. Add your fixed/contract outflows to your variable and vendor outflows to arrive at the total cash leaving your business, week-by-week, for the next quarter.
  4. Do the Math. The next logical step, step four, in your cash flow projection is to subtract each week’s total outflows from the inflows to see if you will generate positive or negative cash flow each of the next 13 weeks. Then add the first week’s net cash flow to your beginning balance to see how your cash position will grow or shrink in the next week. Next, pull each week’s ending balance into the beginning balance position for the next week, completing your analysis for the next quarter. It is often helpful to chart the total cash balance so you can visualize any areas of concern or reasons to celebrate.

Review and Update

This last step has two components. First, review your projection side-by-side with your actual results each week. Study variances and understand what caused certain things to happen unexpectedly in your cash flow assumptions.

Second, update your projection with what you learn during your variance analysis as well as new items, bills, payments, or inflows that arose during the last week. You’ll be amazed how accurate your forecast becomes after just a couple months of this weekly exercise. More importantly, your confidence in your projections as a decision-making tool will grow, and you’ll start making better decisions with your short-term cash flow. Also, be sure to add an additional week of forecasted information each week, making sure you always have a forecast of your cash flow for the next 13 weeks.

Most businesses fail to have a clear picture of their cash flow in the short-term, hoping they have enough to meet financial obligations and save a little extra for a rainy day. But if you build a cash flow projection, you will bring substantial clarity to your most vital resource and how you can best use it.

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