Small business owners soon learn that Cash Flow and Profit are not one and the same. The two may be related but are not always in concert. There can be high profits reported during a period of extremely tight cash flow and low profits reported during a cash rich time period.
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Profitability is based on invoicing and the romantic relationship of costs, either expended or accrued, to those sales. The actual transaction of expenses or receipt associated with invoice payments can, and often do, occur in periods different that whenever the sales occurred, so that income can be widely different from reported revenue in any period.
Cash Flow is based on adjustments in cash balance and can have changes in assets that have a tendency affect profitability. Allowing inventories to develop or accounts receivable to go uncollected and grow can have a tremendous money draining effect on the business. In effect you happen to be converting cash to an investment in these other assets.
During a period of strong growth even a very profitable business can (and usually will) expertise cash flow problems. Therefore , corporate growth or sales success should not be seen as a reason to stop performing a cash flow forecast. On the contrary, it is more important, actually critical, that management has entry to timely cash management information throughout growth periods.
Just as many businesses have succumbed to poor cash administration as have been adversely affected by poor profitability. It is imperative, therefore , that will cash be monitored and handled efficiently, separate and apart from observe your spending and auditing of profit performance.
There are two types of cash flow forecasting that can be done: short term and long term. All of us focus in this article on short term forecasting only.
What a Cash Flow Forecast Is definitely and Does
A cash flow projection is a forecast of anticipated cash costs and receipts over a time span. Typically for short term forecasting the time period is expressed in weeks and covers a projection of 4 in order to 8 weeks out. As a minimum, the money flow forecast should take into consideration these possibilities:
CASH RECEIVED (each week):
Cash Balance Day1, Week 1
Accounts Receivable Payments
Draw from Line of Credit
Loan Takings or Stockholder Funding
CASH EXPENDITURES – Recurring Costs
Payroll Taxes & Costs
Utilities (Gas & Electric, Water/Sewer/Trash)
Telephone (Office, Cell, Pagers/Answering Services)
Computer Services (Internet, Maintenance, Equipment Lease)
Other Equipment Rents or Loan Payments
Vehicle Lease and Loan Payments
Insurance (Health, Business, Life, Property)
CASH EXPENDITURES – Accounts Payable
Vendor Payments for Merchandise (by Invoice)
Vendor Payments for Solutions (by Invoice)
All Other Non-Recurring Payments
You can devise a spreadsheet that accounts for all these items or purchase a pre-designed system that automates the forecasting process and tracks obligations, including the ability to adjust receipt and payment dates quickly and easily. One such strategy is available at the reference given at the Bio at the end of this article.
The goal of income forecasting is to determine deficiencies or even excesses in cash position that could occur in the business during the periods for which the projection is prepared. In case projected cash balance goes unfavorable or below a safety factor, financial plans must be altered, either to provide more cash through intense collections, loans, draws on credit lines, increased (cash) sales, and/or slowing down payments as necessary, until a suitable cash balance is reached.
If excessive cash is projected, it may indicate idle money that could be offer other possible uses such as prepaying expenses or for investment straight into short-term money market instruments.
The aim is to develop a plan that, in the event that followed, will provide a well-managed movement of cash and its efficient, optimum use.