The Cash Flow Statement is derived from the Cash Movement Budget, which is a forecast of statements and payments. The Budget shows in the event that enough cash is available for costs, equipment and goods purchases. Income also indicates whether external causes of cash are necessary. While many business owners believe profits are the most important financial component of a company, the lack of cash is often the biggest reason for business failure. In fact , a company may be profitable; yet, it doesn’t possess the liquidity to pay its expenses. Consequently , effective Cash Flow Forecasting, Planning and Management are essential to a Company’s success.

Planning is short-term (daily/weekly), along with, long-term (monthly/quarterly/yearly) so a business has the optimum amount of money on hand when needed. The Budget controls the flow associated with funds into your business to make essential payments, while not maintaining an exorbitant Balance. It is a function of Management because the efficiency, speed and effectiveness of moving money through a business enables the business owner to turn it over into sales and earnings more quickly, resulting in greater profitability and minimized interest payments.

The Cash Circulation Statement can be a complicated Financial to develop and manage. Therefore , the Budget is a superb place to start and is a very effective tool to handle your business cash flow. The Budget has 3 principal sections to manage:

1) Cash to be received
2) Expected Payments
3) When payments are to be made

The monthly Budget is the principal Cash Flow format. We recommend focusing on three months at a time and build out the Budget for 12-18 months projected in advance. Each month should have a Budget Objective and Actual Column, and the Budget should be on a rolling basis (as you complete a quarter, budget an additional three months).

The first bottom-line for that Budget is the End of the 30 days Cash Balance, which is computed the following:

Beginning Month Cash Balance + Total Cash Receipts – Overall Cash Payments

Simply put, a negative balance will require an increase in receipts, a decrease in payments, or accessing a short-term loan. The second bottom-line may be the End of Month Available Money, which is calculated by subtracting the Monthly Contingency Cash Desired and Short-term Loans required.

The third bottom-line is the Cash Required for Capital Opportunities, which is calculated by taking the End associated with Month Available Cash and invoice discounting in Desired Capital Cash and Long-Term Loans Required.

By successfully Planning your Forecast and Managing the various key elements of the Budget, a company owner can determine the right amount of funds available, when needed. Please refer to the finish of this Article for a Budget Worksheet to assist you in Forecasting, Planning and Managing your Company’s Cash Flow.

Having constructed your Budget, you can now effectively manage your money Flow needs. By using some amounts from your Income Statement and Stability Sheet, you can analyze your present money situation and apply that to future analysis. It is important to understand the interactions between your Financial Statements in order to effectively Manage, Plan and Forecast.

Brian Worrell of Entrepreneur Magazine has some very useful information in his article “Keeping Tabs on Cash Flow” (January 2009) on simple ways to use Cash Flow formulas to effectively manage a business…

A couple key formulas will help you predict and manage sales related issues:

1) The Average number of days to collect money from customers or the Days Sales Outstanding (DSO):
(Accounts Receivable divided by Annual Sales) by 365

2) The Average number of days to pay your bills or Days Payables Outstanding (DPO):
(Accounts Payable divided by Annual Sales) by 365

So how can the DSO and DPO be applied to your company situation?

1) If your DPO is definitely greater than your DSO, you can bring or float your bills longer than your customers do and money will accumulate.

2) If DSO is greater than DPO and your customers are slower in paying their particular bills, then money is leaving behind the business.

3) When DPO is definitely greater than DSO, the bigger the difference, the greater funds are flowing into the business and vice versa.

4) The difference between DPO and DSO, called the Float, is the number of sales days in cash that is moving in or out of the business each year. The equation is:
(Sales divided by 365) x Float

a) As an example: A $1. 5M Sales Revenue business with only eight days of negative float will see $33, 000 in money go out the doorway. This problem can be compounded if the fall happens during one payment cycle.

So how can you fix negative cash flow? Well, it is really pretty simple.
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A couple choices:

1) Collect receivables more quickly through customers.
2) Obtain better payment terms from suppliers.

Combining options one and two will significantly increase your flows, putting much less strain on your business operations and allowing you to manage more effectively for Profits.