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How to Manage Cash with Cash Flow Reports
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Cash crunch! Those are dreaded words for a small business owner. If you’re up against a cash crunch, there’s a chance you didn’t see it coming. Or you were averting your eyes to the on-coming train wreck. Either way, you might have avoided the situation with the help of the ever useful Cash Flow Report, of which there are two flavors: 

  • A cash flow report is a snapshot of the company’s present situation. Your cash flow statement shows you exactly how much money comes in, how much money goes out, on what dates the inflow and outflows occur, and how much money is left over.
  • A cash flow forecast attempts to understand the company’s cash in the future. A forecast uses the same layout as a report, but using projections that are based on actual historical data. A good cash flow forecast tells you how much money you’ll need to cover expenses if you have less money coming in than you have going out.

If you’re using accounting software, you should be able to generate these reports from within that software. If you’re a startup and don’t have historical data, you’ll have to project your income and expenses. A good way to create these reports is to use free templates from SCORE, the Small Business Administration or Enloop. For a one-year time period, the report layout should have twelve columns (one column for each month). Find templates that you’re comfortable with and then create these reports:

  • First, make an income report.  This report lists all of the money that flowed into the company for a certain period of time, typically a one-year period, including sales revenue and any other type of cash that came into the business. If your company is an existing business, use your historical accounting data to create a list of your monthly income streams. The process involves simply listing every instance of money flowing in and out of the company, on the accurate date that the occurrence happened.
  • Second, make an expense report. This lists all of the money that flowed out of the company for the same time period. Where did all the money go? Review the checks that were written, all credit card transactions for the past year and any cash outlays. Take everything into account, including your cost of goods (how much it costs to manufacture or purchase your inventory).
  • Third, make a cash flow report.  Starting with your actual cash on hand at the beginning of the first month, add the income then deduct the expenses to get a closing cash balance for each month. That number is also the starting balance for the next month. Do this for each month in the time period. What you’re looking for are any monthly closing balances that are negative or alarmingly low.
  • Fourth, make a cash flow forecast. If you have historical accounting data, use it to project what your future revenue will look like. Use the same format and layout as the cash flow report, but use projections for the numbers rather than your existing data. For startups, you’ll have to estimate your revenue and expenses with the goal of understanding how much cash you’ll need to carry you to break-even. When trying to define future revenue, make sure your forecasts are realistic and based on actual data. If anything, overestimate your expenses and underestimate your sales. When you begin operating, get in the habit of cracking open these reports once a month to update and review your performance. This is called cash flow analysis. Take the time to review your situation and be alert to red flags.

Just by taking the steps involved in developing a cash flow report you’ll gain invaluable insight into the actual cash situation of your company–and avoid that cash crunch altogether.

Cynthia McCahonFounder and CEO, Enloop.com
After years of providing business planning and development services for private clients, Cynthia became acutely aware that many entrepreneurs struggled to develop accurate business plans and saw the need for a free tool like Enloop.
www.enloop.com | Facebook | @cmccahon | More from Cynthia

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Discussion (1) Comment


  1. Rob OskinsVisitor

    Excellent article, Cynthia. It’s important to know that income statements (aka P&L statement) don’t tell the story about a company’s cash. If you need help creating a cash flow statement — you could ask an accountant to set one up and then ask how to keep it updated.

 

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