How to Figure Out Your Cash Flow In 5-Minutes

photo credit: AMagill

Is your business in danger of running out of cash? Do you get more behind in the bills with each new client you take on? Over 90% of small businesses fail because of cash flow problems.

If you find yourself skipping payments to suppliers, failing to make payroll, using your personal cash and assets to fund your business, even when your business is growing, then you have a cash flow crisis. What can look like success on the outside could be a house of cards preparing to collapse. Read on to learn how you can get a handle of your cash flow right now and immediately make some crucial changes to save your business.

5-Minute Cash Flow Forecast

Managing cash flow effectively is the most important things a business can do, as it is needed both for internal management and to prepare for lenders who must evaluate how you can repay funding. You need cash to produce more of the goods or services that will bring in even more income. You may be making a profit on paper, but if your customers are slow to pay or your pricing fails to cover your rolling production costs, you will lose money and be unable to operate.

Cash flow assessment is so critical. It’s what you’re supposed to do before the cash runs out and yet most business owners hear the words analysis or forecasting and their eyes glaze over. While there is a lot of fancy software out there to help you analyze and forecast your cash flow, the task does not need to be as complicated as many of the cash flow templates out there seem to be.

Here we present you with a quick guide you can always use to get a handle on your cash flow.

Creating a Cash Flow Template

First, you will need a spreadsheet program (you could do this manually, but using a spreadsheet such as the free OpenOffice Calc or Microsoft Excel, will make your life a lot easier.

Open a blank sheet and create columns labeled Item, Opening, and then make columns for each month, starting from January through December.

Under the Item column, create the following rows and headings:

Income (This is a heading)
Sales
Capital (Interest you earn, dividends, all income from your investments)
Total Income (This row should be the sum of the previous two rows.)

Financing & Assets (Heading)
Finance Payments
Lease Payments
(List other payments for lines of credit, credit cards, equipment and assets that you make on a monthly basis.)
Total Financing & Assets (This row should be the sum of the previous rows.)

Direct Costs (Heading)
Materials
Labor
Total Direct Costs (This row should be the sum of the previous two rows.)

Expenses (Heading)
Salaries
Rent
Telephone
Utilities
Insurance
(List other monthly expenses here)
Total Expenses (This row should be the sum of the previous rows.)

Opening Balance (This is your cash on hand, or bank balance at the start of the accounting period, e.g. month).
Total Income (This should be the same as the Total Income from above.)
Total Outgoing (This should be the total of the Financing, Direct Costs and Expenses rows above).
Net Cash Flow
Ending Balance

Net Cash Flow is the difference between the total income and the total outgoing. It is worked out by subtracting the total outgoing from the total income. The Ending Balance is the ending balance at the end of the month. This figure is obtained by adding (or subtracting if it is a negative net cash flow) the net cash flow to the opening balance of the month.

Now, how this works is that you list credit and expenses in the month that you receive or make payment. So, unlike other business forecasts, you don’t list a sale in the same month you make the sale. If you allow your clients net 30 or net 60 or other credit terms, then you list the payments in the month you expect to receive them.

Similarly, be sure you put your expenses down in the months they occur. For example, if you pay one of your utility bills quarterly, enter the payment in the actual month you pay vs spreading payments evenly over each month.

This helps you see where you adjust your cash flow to bring in cash faster or slow down your outgoing payments so that you always have enough cash on hand to meet your obligations like paying employees, buying the materials you need to make new products or service new customers, etc.

So, what if your cash flow template reveals that you are running negative cash flow each month? It’s time to re-assess your business and make some changes or you will find yourself out of business soon.

To help you map out the various solutions to cash flow problems, we have created a free cash flow mind map for members of PowerAchievers.com. Joining PowerAchievers.com is free and you will be able to download the mind map immediately after you join, along with other premium success tools!

Originally posted 2012-02-20 22:25:45.