Worry less about money with a cash flow plan

By Scott E. Schaefer

What is the biggest worry bedeviling small-business owners? More often than not, it’s the fear of having little or no cash flow. After all, if there’s nothing to fill the till, it’s almost impossible to keep the business in business. 

“Many small-business owners tend to look at their checkbooks and if they’ve got a good cash balance, it’s a good thing; if they don’t, it’s bad,” says Jack Krichavsky, a partner with Arthur Andersen LLP in Hartford. “However, that type of thinking is too simplistic and can get a business owner in trouble, in terms of their cash needs.”

The best way to safeguard against money problems is to monitor your cash flow and develop a way to predict how much money you will need and when. Here are ways to do that.

• Review your financial statements. Determine exactly what you’re spending money on. Can you account for all the money coming in and going out through your statements? If not, it may be time to chart your finances to more clearly define your budget and follow the money trail. You could be spending more in some areas than you allotted for because your budget isn’t specific enough. For example, you may be spending more than you expected to on “office supplies” because you’ve upped your spending on postage and you have no separate category for postage in your budget. It helps to identify each category of spending to get the best picture of your expenses. 

• Next, develop a budget. This will show how much money you have to spend and let you decide where to spend it. Create a plan that includes realistic sales goals, all operating costs and what you can expect in profit.

To predict sales levels, take a look at last year’s figures and determine if you will likely have the same level this year. If you are just starting out, compare sales levels month to month to develop a guideline. If your prices will be the same as last year, you can multiply your prices by the number of units you expect to sell to get your expected gross income. 

By looking at monthly sales figures over the past year, you can gauge if there were any peak sales months. If so, that could be when most of your sales will be coming in again. Therefore, you can plan to set aside money from a “bumper” month to carry you through leaner periods. “It’s a good idea to have a two- to three-month reserve of working capital to cover any unforeseen events,” says Krichavsky.

Finally, factor in all your expenses. Get the total costs for the year and divide by 12 so you can estimate how much you’ll be paying out every 30 days. If you don’t think you can live with that budget, revise it and work with a six-month plan or whatever time frame fits your needs. 

• Once you’ve established a budget, it’s time to predict cash flow. If your business operates on a cash-and-carry basis, you can chart cash flow with ease because most of your revenues are collected in the month in which the sales are made. 

If yours isn’t a cash-and-carry business, you can determine a cash flow figure based on your sales forecast. For example, “If you estimate annual sales of $1 million, assume you will collect roughly 60% to 80% of that this year, depending on the period of time (60 days or 90 days) you collect for monies due,” says Krichavsky. The following year, he says, you’ll collect a greater percentage because you’ll have roll-over months’ income coming in. 

If possible, check prior years’ sales records to determine each month’s sales as a percentage of the year’s total. You should be able to apply that percentage to the total sales you expect this year and come up with a figure for estimated monthly cash inflow.

Apply a similar approach to bills. “It’s desirable to hold off paying bills as long as possible to retain as much of your working capital as you can,” says Krichavsky. “However, the impact of these actions on your creditors should also be taken into consideration.”

If yours is a cash-and-carry establishment, though, you probably pay your bills in the same way you receive income — in the month they come in. 

Another approach is to set up a payment schedule, similar to a “budget” plan, in which you pay a certain percentage of the annual expense each month for a specific expense item. 

By budgeting — planning your cash inflow and outflow — you will have some flexibility in determining how to pay your expenses. And it will give you a good sense of your working capital.

It’s important to refer back to your budget regularly to gauge your progress throughout the year. You should be able to tighten the reins to meet expenses when you have to. Even if you’re taking in more money than you expected, that too is a reason to re-evaluate your budget and adjust it accordingly. 

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