Cash flow can be one of the most stressful parts to being an entrepreneur. Can I pay my staff? How will I order more inventory? When can I pay myself?
The answer to these questions lies in being able to predict future cash flows. When this is done properly, we can mitigate the stress from these unknowns.
According to the U.S. Small Business Administration, “cash flow is the lifeblood of a business”, so what exactly is it? Cash flow is the total money transferred into and out of a business during a given period of time. This can be weekly, monthly, quarterly or annually. Essentially, it is estimating when cash will come into the business and when you should spend that cash.
The first step is to determine when you will receive payment from your customers. For example, if clients are invoiced on net 30 terms, it is assumed that 95% of payments are received the month after they are invoiced. Be sure to consider any other sources of cash received on a regular basis, or if your business is seasonal, the variances due to the time of the year.
Next, look at expenses. What are your fixed expenses each month? These may include rent, insurance, leases, loan payments, salaries and advertising. These expenses are typically a set amount with a set due date each month.
Then, determine your variable expenses which can change depending on sales or other factors. Ideally, these are estimates as a percentage of your sales. For example, maybe your staffing costs are about 20 percent of your sales. It can be helpful to review the past few months of income and expenses to dial in these averages.
Additionally, consider upcoming large purchases or any employee salary bonuses, whether they are quarterly or annually, which will result in a higher payroll.
Finally, put it all together. We recommend you maintain a running estimate that stays up-to-date as time progresses, either weekly or monthly.
Take the amount of cash on hand to start the month, add in the income you plan to receive during the month, then subtract out the fixed and variable expenses. This will provide you with an estimate of the cash left on hand. Continue this process for the next 6-12 months or weeks, and you will be on your way to better understanding your business while feeling more confident in anticipating expenses.
As cash flow, pay roll and accounting experts, we are available to answer any and all questions in regards to forecasting your business’ cash flow. Give us a call at 480.596.8299 or get in contact with us!