It’s all about the numbers. In business there is a whole profession actively working on the numbers important to measuring the business activities and position. This is Accounting. The person in business must understand and be ready to supply the numbers for accounting purposes. They also should understand how to make projections of the Cash Flow based on accounting concepts.
Every business owner or future owner must consider the business accounting numbers for costs of equipment, labor, and raw materials. What will the price be, how much will be sold, and what are the inventory requirements?
To make a business run means money invested by the owner and money borrowed from the bank, more numbers. How much cash will be on hand, what credit will be available for customers, how much will overhead and management cost? The answers to these questions are shown in a table of numbers called the Cash Flow. The numbers are important because the truth is that in order to survive, a business must have cash in the bank. The definition of a failed business is one with no money in the bank.
There are many sources for help in understanding how to categorize and record the business numbers needed for the IRS. One of the best is the IRS Small Business Web Site. But, that is not where the number watching ends. Successful business owners view numbers beyond the requirements of the IRS. They collect numbers based on the actual cash cost for everything in the business and numbers for Cash Flow.
The successful business will estimate Cash Flow using an inflow and outflow format for monthly cash flow performance. And they will make it a regular practice to compare projections to the actual performance generated by the accounting system. Failure to estimate Cash Flow is the reason many businesses fail. As the Cash Flow calculator at this link shows, a growing business will need investment in inventory and receivables which will require more Cash Flow than is available from profits.
Cash flow is shown as a chart of numbers with months on the top and income and expense categories on the left side. The numbers in the cells for each month include the actual money transfers that happen, which is not exactly the same as the IRS tax reporting. For example a sale is on credit is not included in the cash flow numbers until the month that the account is paid. Cash flow includes things like loan principal payments and owner investments, in addition to sales receipts and labor and materials costs. A period of one year per cash flow chart is standard. The starting cash is added at the beginning and both outflows and inflows are totaled. If this is negative, corrections must be made.
A spreadsheet program is an excellent tool for making a cash flow statement. It can include all the numbers for inflow and outflow and have calculations within the boxes to find the totals and make statements about cash flow, income, and assets.
Open Office is the name of a free spreadsheet program. Download Open Office and learn how to layout, format, and build a number presentation that will keep your business alive.
Spreadsheets take some time to learn. And the layout requires some understanding of the accounting principals. Basically, organize the cash inflow numbers on the top and include owner investment, loan receipts, and cash receipts from sales. Then show outflow costs for materials, labor, and overhead. Follow this with outflow costs for sales and administration. Next show cash outflows for taxes, interest, loan principal, repairs, new equipment, and owner draws.
In making the projections of cash flow numbers, much of it is based on assumptions. Loan and interest payments are based assumptions about the loan terms. The numbers used in the cash flow projection should be the best guess or assumptions about the expected actual cash outflow.
What is great about having business cash flow numbers in a spreadsheet is the ability to change the numbers and see what happens. You can change any of the assumptions! Take sales for example. What if you only sold 100 instead of 200 per month? Or what if the price was different? Try out the cash flow projections with different costs. Put the new numbers in the spreadsheet program and see what happens.
The better a business is in watching the cash flow numbers, the more chance they will have to survive and make a return to the owners.