WoodDigest.com |

Simply stated, cash flow is the amount of cash received and paid by a business during a defined period of time. As an owner/manager, it is one of the most important measures you have to operate your business. Your net cash flow statement is far more important to you in the day-to-day operation and health of your company than your profit and loss statement.

Unfavorable cash flow can result in the failure of a profitable business simply due to a lack of liquidity and ability to pay current bills. In today’s economic environment maintaining liquidity is critical. If you think otherwise — remember all of our former investment bankers.

If you think it strange for an engineer to be writing about cash flow management, you might be right — except that I learned this expensive lesson years ago when my then profitable business went bust simply due to my failure to manage accounts receivable.

Like everything important in business, your cash flow must be both monitored and aggressively managed. Your cash flow statement needs to be current, correct and within arm’s reach constantly. If you do not operate with a formal cash flow statement, you need to. Talk to your accountant to set up an easy-to-use form — or find one you can download on the Internet — but get one and base your operating decisions on the information it provides.

The “period” of your projections will vary depending on your business model. The longer your lead time, the longer your effective projection period can be. A company working on two-week lead times will find quarterly projections less certain — but take them out as far as practical. As you gain experience (and realism), you will find the process far less cumbersome and more beneficial.

If you are currently on shaky ground, you need to be revising your statement on a weekly basis. In no case should your statement be done on an interval greater than once a month.

Don’t make the mistake of thinking your checking account provides this information. There is only one way to get it — and that is to create it.

PREPARING A CASH FLOW STATEMENT

Possibly the easiest way to start a cash flow statement is to use your balance sheet from the last six months as a basis. If you are preparing a one-month statement, it is simply your receivables and your payables. Don’t forget to include periodic charges such as real estate taxes, payroll taxes and insurance in those projections. You can choose to use monthly accruals to “anticipate” these outflows.

Be realistic in projecting your accounts receivables; if you have a customer who pays in 90 days, why would you think in your projection that he will somehow become current next month? If you see a trend of accounts receivable aging by a day or two each month — don’t ignore that — and don’t think that it will stop or reverse on its own.

If you are in a declining market, be realistic about what you project as business volume. Remember this is a management tool not a marketing tool — this is no time to be unreasonably exuberant. It is far better to “over ship” than to “under ship” to the plan. At the same time being overly conservative about shipments can raise accounts payable to a level not anticipated in your statement.

Include as a line item cash on hand at the beginning of each period — and pay particular attention to that trend. Keep in front of you both the current and future statements as well as the “audited” past statements so that you can see how accurate your projections have been.