Get a Handle on Your Small Business Cash Flow in 4 Easy Steps

Do you want to really have a great handle on your cash flow? Do you want to minimize surprises in your business and reduce stress in your life? Then you need ways to improve your cash flow and create a forecast for your small business. That’s what my smartest clients do; they are always looking ahead, and you should be too.

This is not difficult. Here’s how to get started.

Step 1: Start with a spreadsheet.

On this spreadsheet copy and paste your year to date income statement. It doesn’t have to be exactly right or even reviewed by your accountant, just take it from your accounting system. Make sure all the numbers are there – from revenues all the way down to net income for the year. Create three blank columns to the right of your year to date income statement representing each of the next three months ahead.

Step 2: Take a few minutes and make a few assumptions.

Now, think ahead just 90 days, and start at the bottom with your expenses. Because when you think about it, your expenses are pretty easy to predict, right? There’s fixed expenses like rent and salaries and utilities and a lot of items that are pretty much the same each month.

Then think about revenues.

This is a little more challenging, but you’ve got a lot of this information is too – in your backlog. You probably have a listing of open quotes or proposals and you can take an educated guess when things will close. Depending on the accounting for your startup, you (or your bookkeeper or accounting manager) can talk to your salespeople and ask them to help estimate what their sales will be over the next three months. As you get better at this you’ll learn to adjust those estimates (salespeople are always overly optimistic, which is why they’re salespeople). And you’ll learn to build in cushions and extras, too. Once you’ve estimated revenues you can easily build in your cost of sales because that’s usually a fairly consistent percentage of your sales revenues, right?

Not bad – you’ve created a reasonable forecast for the next quarter. You’re almost there.

Step 3: Think ahead about unusual items.

Next…take a moment to think. Think about anything unusual happening this upcoming quarter.  Things that might result in a cash inflow or outflow. Be sure to keep in mind best practices in managing healthy cash flow, for example:

• Will quarterly tax payments be due?
• Do you have plans to buy new equipment?
• Is there a balloon payment on your building loan coming up?
• Any other unusual payouts?
• Year end bonuses?
• A large purchase of inventory you have planned?
• An unusually new and large project payment coming in?

You’re only thinking ahead 90 days so incorporate these items in your forecast in the months you expect them to occur.

Step 4: Now…keep doing this every quarter!

Notice how I’m not asking you to do this monthly? For most small companies that’s overkill. I have a few clients that only do this twice a year. But for most of the smart business owners I know, a quarterly forecast is sufficient. They commit to this and they ask their employees to do the same. It mostly takes about a couple of hours a quarter. But the effort’s well worth it. If done right, timely and consistently, you’ll have a good idea of what to expect over the next three months. You’ll avoid most surprises and minimize unnecessary disruptions. You’ll have a great handle on how to manage your cash flow.

And no, it won’t be perfect. But it’ll be almost perfect. You’re just estimating. But each time you do this you’ll get better and better. And your forecast will get more and more accurate. That’s how successful business owners operate. They minimize surprises. And they’re always looking ahead.

Next Steps:  You’re busy. We get it. So why not let us do some work for you? By signing up for the weekly Small Biz Ahead Newsletter, you’ll receive hand-picked articles, How-Tos and videos covering the latest in small biz tools and trends. We’ll do the research while you spend your time where it counts: managing and growing your business.