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Cash flow: Calculating your cash flow

Small Business BasicsTo get a handle on the financial outlook for your company, start with your budget, which projects profits or losses by looking expected income and expenses. (If you need a hand with budgeting, check out our stories on the basics of financial planning for business owners.)

For our purposes, the most important use of the budget is that its numbers can be used to help anticipate cash flow needs, which is essential to keeping a business operating smoothly.

The basic elements of cash flow are:

  • Starting cash -- This is your starting balance -- what you have on hand at the beginning of each month.

  • Cash in -- This is all cash received during the month, including sales, paid receivables, interest or cash from sales of assets or stock.

  • Cash out -- Includes all fixed and variable expenses.

  • Ending cash -- This is your ending balance. Add starting cash to cash in for total cash, then subtract cash out.
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Here is an example of how you measure cash flow by subtracting your monthly ending balance from your starting balance.

  Month 1 Month 2
Starting cash
Cash in
    Receivables paid
Total in
Cash out
   Owner's draw
Total cash out
Ending cash
Change in flow

Let's say you started the month with $3,500. You brought in $2,500 in sales and $500 in paid receivables. You paid out $1,500 in rent, $250 in supplies, and $1,750 for wages and owner's draw -- for a total of $3,500 in expenses. Your ending balance is $3,000.

While you did show some sales, your monthly cash flow would be -$500. To survive, you want positive cash flow, which means taking in more than you are spending. Positive cash flow gives you forward motion to build and grow.

Even a small lag in sales or an outstanding bill can make a dramatic impact on cash flow, but you won't know that without your cash flow budget. At the end of every month, compare actual business sales with estimated cash flow and hold them up against your master budget.

If they are out of sync, consider the cause. Maybe you didn't factor in the need to hire summer vacation replacement help or the jump in paper prices for your printing business. Cut back on cash out where you can, and adjust monthly cash flow projections to more realistically meet your needs.


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