Let’s Talk Cash Flow: What It Is and What It Isn’t

Cash flow is the top metric to track, bar none.

As my financial management teacher in B-School would drill into us mission-driven social entrepreneurs, “If you don’t have a viable business, it doesn’t matter how much good you want to do in the world; you’ve got to be sustainable.”  And the fastest way to unsustainable is to run out of cash.

What’s the best way to track your cash?

Why an Excel spreadsheet, of course. I can count on one hand the number of times an Excel spreadsheet is a good idea and this is one of them.

What you’re tracking is the timing of cash coming in and going out.

Here’s how to create a cash flow projection:

• Make a list in column A of all your expected receipts and in column B put the date of the month that will fall on.
• Order this list by the date of the expected receipt or transaction.
• Make columns for each month for the next twelve months. The amount goes into the appropriate month.
• Start this list with your the balance as shown in your check register.

Here’s what I’m talking about:

	due date	Jun-17	Jul-17	Aug-17
book balance as of:	6/27	7,607.51	7,516.51	10,566.51
office rent	1st		(150.00)	(150.00)
AR – PAFM	5th		500.00
AR – TTM	10th		4,500.00
Owner Draw	15th		(1,500.00)	(1,500.00)
AR – GDM	25th			4,500.00
AmEx 3000	28th	(91.00)	(300.00)	(7,000.00)
		7,516.51	10,566.51	6,416.51

A couple of things I want point out:

1. The “book balance” in the balance in your check register. It is NOT the cash balance in your bank account as shown by the bank on their website. The book balance is critical to get right here because the cash flow projection is all about timing.

2. Because this is about actual cash going out, whatever you charge on your credit card does not get listed on the cash flow. Only the amount that you are going to pay on your credit card goes on the cash flow. My AmEx earns miles on Delta, so I charge whatever I can onto that card. That’s why in this example you don’t see my cell phone or restaurant charges and such.

Why maintain a cash flow?

Cash flow is all about two things: when the cash comes in and out, and how much cash goes in and out of your checking account. That’s it.  Projecting out your future cash flows will expose exactly when you might run into a negative cash position. Let’s take a look at the same example, with one difference: the beginning book balance.

	due date	Jun-17	Jul-17	Aug-17
book balance as of:	6/27	495.01	404.01	3,454.01
office rent	1st		(150.00)	(150.00)
AR – PAFM	5th		500.00
AR – TTM	10th		4,500.00
Owner Draw	15th		(1,500.00)	(1,500.00)
AR – GDM	25th			4,500.00
AmEx 3000	28th	(91.00)	(300.00)	(7,000.00)
		404.01	3,454.01	-695.99

Given this scenario, you can clearly see that I’ll run out of cash at the end of August. So something’s got to change. And I have a few options. I can decrease my Owner Draw, or I can reduce my AmEx payment in August, or I can bring in more sales, or any combination thereof.

There are three reasons why you might find your business in a negative cash position: timing, volume, or unprofitable business model.

1. If it’s a timing thing, you have lots of control over when you incur expenses and when you pay them. For example, Paul runs a Christmas tree farm and, as you would expect, all his sales come in December of the year. He brings in a net operating profit for the entire year, so he looks great on paper, it’s just that cash comes in all at once. So he keeps enough in reserve to tide him over from January through November and a cash flow projection helps him do that.

2. If it’s a volume thing, you just need to bring in more sales to cover your costs. Easier said than done, but it’s a pretty straightforward marketing problem.

3. If it’s a profitability thing, that’s a bit more serious. It means that no matter how you futz with the timing, you’ll run out of cash eventually.   It means that your costs are more than what you bring in on each thing that you sell. That’s when a turnaround is in order because the business model needs to be changed so that your product or service is profitable #1, and that you have the volume needed to throw off enough profit to be a sustainable business #2.

Cash flow projection vs. Statement of Cash Flows:

These are NOT the same thing by any stretch. A cash flow projection is created and maintained outside of your QuickBooks accounting software on an Excel spreadsheet and is all about timing and amounts of FUTURE cash inflows and outflows.

A Statement of Cash Flows is generated inside of your QuickBooks and is about the PAST sources and uses of cash. This is a report that you most likely will very rarely use unless you deal with outside investors and debt. Then this is an important analysis tool to see where your money comes from (revenue or debt) and where it goes (operations or financing the debt.)

Want some help constructing a cash flow projection for your business?  Hit me up with your specific questions in the comments below and let’s get you going.