Cash Flow is a measure of the money flowing in and out of your business. It is one of the financial statements required to describe your business along with the balance sheet and income statement. Cash flow problems are one of the top causes of business failure since without cash, you will not be able to pay your suppliers and, employees.

Performing projections of future cash flow is an important tool to predict the likelihood of your company staying solvent. It is a key component of “Know your Numbers” to determine the success of your business. In the case of unplanned events, evaluating future cash flow scenarios ensures your financial resilience and keeps your business open

At the same time, small business owners are focused on operations and cannot afford a lot of time planning. Therefore, it is essential to implement an efficient planning process to ensure business success.

There are two cash flow approaches. One performed by your accountant that described how much cash was generated in a past period, and another one that must be performed by the owner/manager to forecast future cash flows. The latter is an important management tool to prevent cash flow problems. It allows ample time to take action and ensure enough cash to cover operations.

A best practice in cash flow analysis is to have a rolling eight to 13-week cash flow prediction with estimates of cash coming and expenses. If there are problems ahead this advanced indicator enables the owner to explore more alternatives on how to avoid the problem. The approach should be tailored to the specific needs of the business.

This provides a road map for the short-term which needs to be adapted to the realities compared to assumptions made. However, a plan is better than no plan. Do not expect perfection the first time you do it. Cash flow forecasting is a learning process and the more you do it, the more comfortable you become.

With the results of the cash flow forecast in hand, business owners will understand how cash is being generated and how cash is used. It can assist in making decisions on planned purchases if cash is available, or have alternative solutions if cash is restricted. Alternatively, a loan can bridge the gap and can be established well in advance of the need.

Cash flow can be improved by speeding up how cash comes in. Accepting credit cards and issuing an invoice immediately after product delivery are good tactics. For retail operations, cash transactions are ideal, but owners need to consider the timing for credit card settlements. On the cash outflow side, managers should take advantage of the terms given by suppliers, i.e., typically to be paid in 30 days. Clearly, the best way to improve cash flow is to have a profitable business. In addition, the owner should make sure the pricing is up to date and costs are justified.

I will be leading an hour-long webinar on Jan. 19,  2021 “Cash Flow Management Basics” for SCORE Bucks County. I will discuss the importance of cash flow, as well as management actions to improve cash flow in greater detail. The webinar is free and business owners and entrepreneurs are welcome to attend.

About the Author(s)

 Alberto  Casadei

Alberto Casadei is retired from the Energy Industry and has extensive experience in operations management, engineering, product development, and business development.  He is a certified Mentor with SCORE Bucks County since 2013 and serves as the Chapter’s Operations Committee Chair.

SCORE Certified Mentor, SCORE Bucks County
Happy small business owners working with laptop at cafe