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Cash Flow Management

Posted on December 17, 2021 by Ryan McAllister

Many small business owners think their financial statements will give them all the information they want. Financial statements are an historical tool which shows you where your company has been. A Money Flow is the fancy name for a working budget which lets you know how much money your business actually has. Working in sync with your balance sheet your cash flow needs to be an easy-to-read tool which lets you monitor sales, prices, profitability, collections and money. It permits you to plan for future cash needs for expansion, while identifying operational problems requiring immediate action.

Successful cash flow preparation doesn't need a degree in accounting.

What you need is real time comprehension of where the money is originating, where it's going, and how much is left over (just like you do at home). Businesses will need to work with a cash flow model which appears ahead 1 year, month by month, and is updated with real results each week.

Create a Worksheet

The formula for successful cash flow management is deceptively easy. Money in. Money out. Money left over. When there is not any money left over, then you will need to do something otherwise.

Start with Earnings. Sales is work done that is recorded by cash register receipts, guest checks or invoices. Project the number of sales you expect month-by-month beginning with the current month. Sales should fluctuate when you consider the seasonality of your business. Break the earnings into classes and be conservative.

Job your collections month .

Collections are the cash you put in the bank in the shape of cash, checks or credit card vouchers. If Sales don't equal Collections, you have accounts receivable or a money control issue.

Review your expenses.

Define your expenditures into two big regions: Cost of Revenue (expenses that vary with sales like product prices ) and Overhead Expenses (expenses that don't vary with sales). Define the cost proportions to your important sales categories. Forecast all other Overhead Expenses (rent, utilities, insurance, permits, etc.). Job out all expenses in the month they'll be paid.

Forecast your payroll.

List your present and expected employees and categorize them as Cost of Revenue labor or Overhead labor. Cost of Sales labor might be projected in part by a goal labor cost percentage. Estimate payroll expense per employee (average hours worked, rate of pay) within the next twelve months.

Evaluate Your Profitability

With monthly sales and expenses projected, company profitability, feasibility and value could be set.

Total Earnings minus Total Cost of Revenue Expenses (such as Cost of Revenue payroll) minus Total Overhead Expenses (including Overhead payroll) equals Monthly Cash Reserve. This can also be your profitability.

Is there any money left?What debt are you currently servicing?

Assess this debt separately from your profitability. Debt takes many forms such as notes, loans, credit cards, leases, and lines of credit. When companies must restructure their debt to be able to increase cash flow, lenders expect the company's Balance Sheet to look a certain way to be able to be eligible for financing.

So, What is Next?

After this working budget is constructed, a break-even sales volume could be ascertained that generates enough profit to pay debt burden and don't have any cash loss. Your cash flow goals are now clarified and approaches can be implemented. Any problems that caused a cash flow issue will then be corrected.

With your Cash Flow mapped out, you've got the start of control.

Cash Flow Planning brings financial stability to a company through pro-active budgeting, monitoring and adjustments. You may understand where you are now and what your choices and priorities are. You'll have the ability to forecast your cash needs and gain control of your organization. By means of a Cash Flow, your organization will have more cash and a road map to your future.