Toolkit for success: Cash flow

Profit and loss statements and cash flow statements take your company's numbers and crunch them in different ways for different purposes.

• The profit and loss statement looks at how you are using your resources to make sales.
• The cash flow statement, if maintained monthly, lets you visually measure how your money is flowing in and out of the business.

A. Profit and loss statement
You should generate a profit and loss statement monthly.

When examining a profit and loss statement, you want to look at total sales, cost of goods sold, total operating expenses and net profit.

Look first at sales and cost of goods sold. Compare selling and production expenses, and look at the ratio of cost of goods sold to sales.

Unless you have made a major change in the business operation, these numbers should be stable from month to month. If they aren't, find out why. Are you overspending? Are you missing an opportunity to cut those costs on a regular basis?

Expenses
Next, focus on operating expenses.

They come in two categories.

Some expenses occur every month at more or less the same time and costing the same amount of money. You know what they are -- the lights, lease, water, staff payroll, payroll taxes and so on.

Other expenses occur at less-regular intervals. Many accountants are paid every quarter for putting together your financial statements. Your tax accountant is paid once a year to fill out those IRS forms.

Again, you're looking for stability in the monthly bills and a minimal number of surprises on the less-regular ones.

Net profit
Net profit before taxes is the other major number to examine. This will tell you whether those other two categories, sales and expenses, need to be examined more closely. Why is net profit going up or down?

B. Cash Flow Statement
Like the profit and loss statement, it should be produced monthly.

The cash flow statement is the easiest tool with which to measure immediate success. If it's negative, you had more money going out then came in. If positive, you took in more money than was paid out.

First, examine the monthly sheets. Does your cash flow fall into a pattern? If so, is it causing a crimp in your company's ability to succeed?

Now look at cumulative cash flow. That tells you the total cash flow from the first month of the year to whatever month you're in now.

For example, let's say your cumulative cash flow as of June 30 is $7,200. This means you brought in $7,200 more than you paid out for the first six month of the year. That's good, in the sense that you're not going deeper into debt. But you need to compare that with the same time last year. Is it higher or lower?

Cash on hand
How are you doing with the amount of cash on hand? A good, thorough cash flow statement for a small business will include a section that monitors the amount of cash on hand at the beginning and end of the month.

It's a simple calculation. Add receipts to cash on hand at the beginning of the month. From that, subtract cash disbursements. The final number tells you how much cash you have on hand in the bank at the end of the month.