One of the most important key figures in working out Cash Flow projections in your business, is your beginning/ ending cash balance on hand. This ending cash balance is the total amount of cash you have on your balance sheet once you’ve closed your books for the month. This is how much money is available once all your outstanding checks clear the bank.
For example, for this month of July, we would be looking at the balance sheet which ended June 30th, to determine what your ending cash balance is to start out this month. So…what should that balance be on a monthly basis to give you good Cash Flow results?
You may be familiar with a cash flow statement that your CPA provides. This statement is a snapshot view of your cash on hand as of a specific date. My Cash Flow Forecast tool provides an 8-month projection of beginning/ ending cash on hand balances based on a 4-month trend of the business financials. In forecasting, we are projecting cash on hand balances against projected monthly revenues and projected monthly outlays of cash. This process gives a projection of what “Cash on Hand” will be for the next 8 months.
If you are feeling a Cash Flow squeeze in your business, or even a problem with Cash Flow, one of the key figures to pay attention to is your cash on hand balance. So what should that amount be?
- Should it be 2 x your monthly payroll amount?
- Should it be equal to the average monthly outlay of cash (this would be all the expenses paid on your profit and loss + debt servicing + owner’s distributions)?
- Should it be 3 x your monthly expenses?
Bottom line: this key figure is different for every business. You need to educate yourself on what will work best to help OPTIMIZE Cash Flow. If you are not doing any Cash Flow Forecasting, you are basically “winging it” by feeling the pain each month when you are struggling to make payroll or pay vendor bills. What if you could create a strategy to help you know what this key figure should be and feel empowered when reviewing your monthly financials?
I think every business owner, CEO, and doctor that is running their own business, should be looking at a profit and loss, balance sheet, and a CASH FLOW FORECAST every month to learn what their beginning/ ending cash balance number should be. To learn more about how Cash Flow Forecasting can help you, check out my short video vignette.