Where is your Company positioned in the Cash Flow Arena?

Understanding how to manage cash flow takes more than just reading a profit and loss.

It is not uncommon for a company to show a net profit on their income statement and still find that they are having shortfalls of cash each month. Why is that? Where did the money go if it is not in the owner’s bank account?

Many business owners now have a lot of money in their bank accounts due to the PPP Loans, EIDL SBA money and / or grant money that has been a lifeline.  I will also speculate that most businesses will get their PPP loans forgiven and that will be a great cash flow gift.  But will it be enough to sustain your business into next year?

Cash flow is the lifeblood of any company.  Just because you may have more money in your bank account than ever before, does not equate to good cash flow.  If you have experienced cash flow issues, or you want to make sure they are not lurking around the corner, today is a great day to begin building this financial muscle.

Start with answering these questions:

  • What is your cash on hand balance from last month?
  • What are your average cash revenues (not accrual revenues), monthly?
  • What is your average outlay of cash, not total expenses each month?
  • What should my monthly cash reserves amount be to not run out of money?
  • Were you having a cash flow problem/challenge before COVID?

Having trouble with answering any or all these questions?

Here is a Hint: It will take more than looking at your Profit and Loss statement to get the answers.  You will need to understand your Balance Sheet to help give you the answers.   Learn more about following the money to your Balance Sheet.

Let me help break this down for you:

  1. Your Cash on Hand Balance: This is one of the “key numbers” in the cash flow equation.  The ending / beginning cash balance for a month will come from your Balance Sheet (not from your online banking account).  This is the starting point for knowing how much money you will have in the current month to work with in your cash flow equation.

Example:  Say we are assessing cash flow for August.  You will need to look at the Balance Sheet ending July 31st, the month prior to get the total amount of all your bank account balances.  This will equal the beginning cash balance for August.  Make note, this will include all outstanding checks that are in play but have not hit your bank account.  

  1. Your Average Cash Revenues: This is the second “key number” in the cash flow equation.  Sticking with #1 scenario, that we are working on projecting cash flow for August; what are your projected revenues that you are planning for that will clear your bank account by August 31stThis means following the money into your bank account; not what you booked but have not collected.  I like to use an average of the last 4 months of revenues to start my projection in helping me to forecast revenues.

Note:  This number is going to be tied to your accounting system; what your bookkeeper has closed the previous months on your Profit and Loss and showed as income.

  1. Your Average Outlay of Cash: This is the third “key number” in the cash flow equation.  This is where the Balance Sheet comes into play.  Outlay of cash is different than total expenses.  Total expenses come from the Profit and Loss.  You are looking at Revenues – Expenses = Net Profit.  Outlay of cash is more than that.  It includes the cash that is posting to your Balance Sheet each month such as debt servicing, asset purchases, shareholder dividends/distributions to name a few.  If you have a loan, the principal payment is posted to the Balance Sheet (the interest is posted to the P&L).  Do I have your attention?

Example:  To calculate total outlay of cash, take your total expenses you are budgeting for August + loan principal amounts + shareholder distributions = Total Cash Outlay.

  1. Your Monthly Cash Reserves: This “key number” is different for every business.  You need to educate yourself on what will work best to help OPTIMIZE cash flow.

Example:  Should this number be 3 x your monthly payroll expense?  Or it could be 1 x your monthly cash outlay.  What is going to help you sleep like a baby at night knowing that you will not run out of money?  That is what this amount needs to be on a monthly basis.

  1. Let us put it all together for our monthly cash flow projection. For this example, I am going to stipulate that the beginning cash balance includes PPP funding of $80,000.  (Prior to COVID, the beginning cash balance might have been as low as $45,000):

Beginning Cash Balance:                              $122,562

Cash Revenues Projected:                          + $110,000

Subtotal of Cash for August:                         $232,562

Average Outlay of Cash:                             –  $125,000

Projected Ending Cash:                              $107,562

This is just for one month, the current month.  You can see the importance of adding debt servicing and distributions to the outlay of cash.  This number is higher than the revenue number.  What if your revenues come in short and your outlay is the same?  It is not uncommon for business owners to spend the money as fast as it comes in.  How will you handle additional expenses (i.e. quarterly tax estimates, payroll bonuses, etc.)  that are in addition to the monthly budget?  You will inevitably start to chip away at your cash reserves

Before COVID, were you having a Cash Flow Problem?

If the answer is yes, then it is important to change some of your money habits that contributed to the cash flow shortage.  Were you “winging it” with your financials?  Did you have an Accounts Payable process in place to control the outflow of money?  Did you have a debt strategy?  Or if you wanted it, you bought it and accrued credit card debt or maxed out a line of credit?

Now that you have received funding, if you do not change some of those money habits, you are likely to re-create a cash flow shortage.  It may not happen for 6 – 12 months as you whittle away your stash of cash.  In my experience, it is likely to happen!

Managing cash flow is not about the next 30 or even 60 days.  That money is already in play!  You have already committed to payroll, vendor bills, and you may or may not have control of your revenues due to the Pandemic.  The art of managing cash flow is to look 90 to 120 days into the futureMy cash flow modeling methodology forecasts 8 months into the future to predict a likely outcome.

Find confidence and comfort in your business’s cash flow arena.  Schedule your complimentary consultation by calling 303-835-7992.