Managing Your Cash Flow ~ Part 4


8. Surviving Cash Flow Shortfalls.
At some point you may find yourself in a situation where you have more bills than money. You shouldn’t panic. It doesn’t mean you’ve failed, just that you’ve run into a cash flow snag. When times get tough it’s natural that money gets tight. This is when it is especially important to ensure that the cash flows keep flowing.

The sooner you know you’re running short of cash the better. Having some form of credit available to tide you over means you’ll have the money to stay on track until you can get the money flowing in again. Rather than waiting for the caca to hit the fan, go see your banker when things are good to make provisions for when the road gets a little bumpy.

In the best of worlds, you will have built up enough of a business emergency fund to not have to tap your credit. But if circumstances conspire and your timing is off even slightly, having some credit available can be what it takes to keep the business afloat.

If a line of credit is not an option because you have no credit history or because bankers have gotten tight with their money, you may have to turn to your suppliers. Try to negotiate extended terms, especially true if you've been a good customer in the past and kept them informed about your financial situation.

Choose the bills you'll pay carefully. Payroll should be your first priority followed by your most crucial (and unforgiving) suppliers. Ask the rest if you can delay a payment or make a partial payment.

The single best way to monitor your cash flow is with a Cash Flow Projection, which shows how much cash you expect to move in and out of your business over a specific period of time. Some people recommend a year long projection, which is great if you can swing it. But you can make a three- or six-month rolling projection (meaning it keeps rolling forward so you always have three or six months’ worth of numbers to look at) work for you too.

Bankers love cash flow projections since the offer “evidence” that you’re on top of your stuff and that your business is a good credit risk. Don’t confuse a projection with a Cash Flow Statement. The statement shows how cash actually came and went. The projection is how you anticipate the cash will flow over the period at which you’re looking.

Cash Flow Projections have three parts:
Cash revenues
Cash disbursements
Reconciliation

The Cash Revenues is where you enter your estimated sales figures for each month. These must be sales that are collectible during that month, so you can’t put in guestimates and pray that it works. You must focus on sales that are collectible in cash during the specific month with which you’re dealing.

Cash Disbursements is a list of the cash expenditures you actually expect to pay for each month.

The Reconciliation begins with your opening balance, which is the carryover from the previous month's operations. Add the current month's revenues. Subtract the current month's disbursements. The adjusted cash flow balance is carried over to the next month.

Microsoft office has a template you can use or follow as a guide to create your own Cash Flow Projection. http://office.microsoft.com/en-ca/templates/TC011132361033.aspx?CategoryID=CT101441951033

Be careful about being too optimistic when you’re doing your cash flow projection. This isn’t supposed to be an exercise that makes you feel good. It’s supposed to be an exercise that helps you see what’s real and figure out how you’ll cope with what you see.



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