Financial planning: Figuring cash flow

While your worksheets help you build a budget for the future, you will need to check periodically on the immediate financial health of your company. Cash flow analysis can help you do that. A projected cash flow statement estimates what the flow of money will be like in the coming months or years based on a history of sales and expenses. A monthly cash flow statement reveals the current state of affairs.

A cash flow budget is your core tool in maintaining control over company finances. While you can almost always cut back on costs, or the cash going out, you can't always generate sales, or income. So you need to know where the money is, and where it's going.

The basic elements of cash flow are:

• Starting cash, or starting balance -- What you have on hand at the beginning of the month.
• Cash in -- All cash received during the month, including sales, paid receivables, interest or cash from sales of assets or stock.
• Cash out -- All fixed and variable expenses
• Ending cash, or ending balance -- Add Starting Cash to Cash In for total cash, then subtract Cash Out.

Here is an example of how you measure cash flow by subtracting your monthly ending balance from your starting balance.

Let's say you started the month with $3,500. You brought in $1,000 in sales and you paid out $400 in rent and $600 in wages for a total of $1,000 in expenses. So your ending balance is still $3,500. While you did show some sales, your monthly cash flow would be $0. To survive in business, you want positive cash flow, which means you are taking more in than you are spending. Positive cash flow gives you forward motion to build and grow.

Even a small lag in sales can make a dramatic impact on cash flow, but you might not know that without your cash flow budget. At the end of every month, compare your actual business sales with your estimated cash flow projections. If they are out of whack, 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 inventory. Cut back on the outflow where you can, and adjust monthly cash flow projections to more realistically meet your needs.