Small Business Blog

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So you have a large debt repayment due on the 15th of this month. And you have to run your payroll on the 13th. Are you going to wait until the 10th to decide if you have enough money to meet these obligations? Or are you going to cross your fingers and hope that you have enough room on your credit line to cover any potential shortfalls?

Having interacted with a fair number of small business owners, I can tell you: there aren’t enough entrepreneurs out there actively managing the cash in their small businesses. In good times, the “come what may” cash management strategy probably works out just fine. But in bad times, when customers are closing their wallets and vendors are raising their prices, a reactive approach to cash can kill you.

So what’s a small business owner to do? When you want to know what’s going on with your business’s cash flow, now and next week, next month or next year, you need to get a cash flow model. By cash flow model, I mean an set of working, interactive financial statements that allows you to test the impacts of various sales and spending scenarios. If you know how to link up your balance sheet, income statement and cash flow statement, you can build a cash flow model in any spreadsheeting software like Excel.

Alternatively, you can download our small business cash flow model absolutely free. Just provide your email address (see the box to the right) and we’ll send over the download information.

Having a cash flow model spares you the tediousness of continually assessing your cash balance, your expected cash production and your expected cash outlays. You can input your assumptions with a few clicks and then watch how the cash balance adjusts. With our free small business cash flow model, any projected cash shortfalls are funded with an increase to the revolving line of credit.

Managing sources and uses of cash

At the end of every reporting period, your business’ cash balance reflects the net impact of various sources and uses of cash.

Common sources of cash include:

• Asset sales
• Declines in accounts receivable
• Declines in inventory
• Increases in accounts payable
• Net income plus depreciation and amortization (net income is the net of sales and expenses, but you add back the depreciation and amortization because these are non-cash expenses)
• Increases in debt
• Stock sales
• Owner contributions
• Receipt of loaned funds

Common uses of cash include:

• Asset purchases or upgrades
• Increases in accounts receivable
• Increases in inventory
• Decreases in accounts payable
• Net losses plus depreciation and amortization
• Debt repayments
• Stock repurchases
• Owner distributions/dividend payments

Most people can’t keep track of all these moving parts in their head or even on a sheet of scratch paper. But if you have a cash flow model, you don’t need to. Just plug your numbers into your spreadsheet and watch your cash balance move up or down accordingly.

You will want to use your cash flow model to project your future cash balance when you have large cash expenses, such as payroll, debt repayments, lease payments, capital spending, and seasonal inventory build-ups, on the horizon. But you can also use a cash model to test the impacts of:

• Rising sales
• Falling sales
• Increases/decreases in accounts receivable
• Increases/decreases in inventory
• Increases/decreases in accounts payable
• Early debt repayments
• Changing expenses
• Taking advantage of 2% 10/Net 30 discounts

Being able to test a multitude of different scenarios might inspire you to make very positive changes in the way you run your business. For example, you can decide what it’s worth to you to optimize your accounts receivable collection procedures or to change your inventory-buying schedule. And, once you start implementing changes, you can then use your cash flow model to test your actual performance against your projections — an exercise that ultimately makes you better at predicting how various factors affect the financial health of your small business.