Assessing your Cash Flow

In business, cash is king. It doesn't matter how long a business has been around; if it runs out of cash and it can't get financing, it's done.  Many agree that good cash flow analysis is the most important part of any business plan.

However, you can't simply look at your bank balance to know how things are going.

Assuming your business follows the local economy, where a successful year is followed by a slower period, it is likely that the business will have an inordinate amount of cash on hand.

But don't let that fool you into thinking everything is OK.

If the business is only breaking even or losing money in its day-to-day operations, that cash in the bank won't last long. 

So the question is, how long will it last and what changes can be made in the business to preserve its cash, or better yet, bring it back into a profitable position?

Creating a cash flow pro forma is the best way to work out the various scenarios so business owners can make informed decisions.

Chartered Professional Accountants can help guide you through the process of building a cash flow pro forma, including helping you assess a few common things you will need to know to make it work: your opening cash balance, your expenses by type and sales projections.

 There are three basic types of expenses that you will need to establish:

  1. Fixed expenses don't change when sales fluctuate i.e., manager salaries, rent, etc. 
  2. Variable expenses go up and down with sales i.e., supplies and materials.
  3. Irregular expenses happen infrequently i.e., annual insurance premiums, legal fees.

Finally, and perhaps the most difficult, are sales projections. The beauty of cash flow pro forma tools is that you will be able to quickly see what the impact of various sales projections will have on the cash in the business.

So with a little effort and analysis, and a quick call to your local Chartered Professional Accountant, a business' cash flow can be managed. In tough times, it is possibly the most important work you can do.

Tyler Vreeling