Cash flow is simply that, the flow of cash. When running a business, the saying “Cash is King” has never been more important than in the current economic slowdown. Being profitable does not necessarily mean being liquid, or having cash available. A company in not able to make payments with net profit, payments are made with cash flow generated by the business. At the end of the day, nothing is a bigger factor in determining if a company succeeds than if they have enough cash to cover current and future obligations.
With cash flow being the lifeblood for a business’s continued existence, it has always been surprising to me that few companies take the time to monitor and project cash flow on a regular and timely basis. Projecting your cash flow, especially using a specific period to compare, will help you learn more about your business and the activities that bring cash in and take cash out. This process can be very simple. For example, start by listing all the items in a given period of time that would put money in your business (cash sales, paid receivables, asset sales, interest earned, rental income or draws on a loan) and the items that would take cash out of your business (wages, accounts payable, owner draws, loan payments, asset purchases).
This simple analysis will allow you to look ahead to future purchases, opportunities for revenue growth and see if you can meet future obligations. It will allow you to adjust based on current cash flow and help you work on the business, not just in the business.