Plotting the cash flow

Press, 6 July 1983, Page 29

Plotting the cash flow

The cash-flow plan helps the small-business owner to manage the cash in the business. It puts together the estimate of business activity in a way which allows the owner to predict the bank balance at the end of each month. This means he or she can plan for those months when additional funds are needed, or consider how to make the best use of short-term surpluses. A business that fails to monitor its cash flow can easily run out of cash. This can often mean the end of the business. Last-minute appeals to lenders usually do not work. Some business owners keep unnecessarily large amounts of cash on hand "in case it’s needed,” or as a result of a seasonal peak. They are cheating their business of growth opportunities and are not getting the best possible returns on their assets. Making profits does not necessarily mean the business will have more cash in

the bank. Increased sales can be accompanied by a shortage of cash if debtors and stock are not controlled. A growing business eats money. If it is planned to make a substantial change to the business, such as opening a new shop, the cash flow forecast should cover the whole period of change. Otherwise, forecasts should each cover a six-month period. Once the cash-flow plan has been completed, it should be reviewed. It will highlight potential problems and give the owner time to find ways to prevent their happening. The month-end balance may change significantly from month to month as a result of seasonal peaks or major costs. Look for trends. A series of increases could show funds available for expansion or for investing elsewhere. A series of decreases is a warning signal that the business may be headed towards a cash crisis.

Ensure that the predicted overdraft is within present limits. If not, consider what changes can be made to plans to enable the business to operate within limits. The owner should not run straight to the bank. The owner may find that some expenses can be spread or some spending moved to parts of the year when there is cash in hand.

The forecast should be considered as the business’s most important management tool. It should be referred to at least monthly and actually results inserted. Actual and forecast results should be compared. This will highlight how well the business is doing and enable it to take corrective action. The owner should ensure that this comparison is done immediately after the end of each month. Timing is more important than total accuracy. The forecast should be used as a communication tool with outsiders: the bank, other lenders, the ac-

countant, major suppliers if the firm is trying to negotiate extended terms or with key staff members. Small-business owners will find that the cash flow is the most immediate and effective tool the firm has. It should never be without it. The Small Business Agency has just produced a new small-business guide, “Cash Flow Forecasting,” which is available from its offices for ?1, together with a pad of forms at $l. An accountant can help the owner prepare and review the forecast.

These articles are part of a series on small businesses prepared with the help of the Small Business Agency of the Development Finance Corporation. The articles are printed on these pages on the first and third Wednesdays of the month.