Cash Flow Analysis

The cash flow analysis discussed here differs substantially from the Statement of Cash Flows included in formal financial statements. Instead of just reporting historical cash events, this analysis is composed primarily of your best projections and forecasts of what your company will need for future cash (tomorrow and beyond), and how you intend to spend it each month. The most important use of a cash flow analysis is to know in advance how much cash you will likely need, so you will never be surprised by unexpected bills.

This document is something you will likely have to prepare yourself until your business grows enough to support a qualified bookkeeper, but it does not have to be overly formal or onerous. I suggest making a simple EXCEL (or even handwritten) spreadsheet of fourteen columns. The first column depicts the line item names for Receipts (cash in) and Expenses (cash out).

The next 12 columns are simply one column per month for the next 12 months. The last column is simply totals of the 12-month projections so they can be crosschecked with the pro forma statements in your business plan.

I have prepared a sample Cash Flow Analysis in pdf format (opens in a new window) that I suggest you download so you can follow along as we discuss managing your cash flow.

Beginning Cash
This first line item is the amount of cash you have, or think you will have, at the beginning of the first month of your analysis.

Sales Billings
The next line item is the projected billings, or invoices you think you will be sending out to your customers for whatever sales you offer terms on. This can be taken directly from your pro forma P&L, but here, the line of numbers is for reference only, because you cannot count your "cash" until you actually receive it.

Sales Receipts
The third line item is the amount of money you expect to collect each month from your billings. It is assumed here that you offer terms to your customers so that collections will come sometime after your billings. A few customers may pay early, and a few customers may pay late, while the majority will likely pay as agreed. The point is that collections always lag billings, and that is what comprises the financial term of “Accounts Receivable (A/R).”

Even if you don’t offer terms (say, everything you sell online is paid in advance)—you still need a cash flow analysis, and you should go through this exercise to determine if you will have enough cash coming in to pay your expenses.

By adding “Beginning Cash” to “Sales Receipts” you have an estimate of the amount of cash you will have during the month to pay the bills for that month. In the event this amount is not sufficient to pay your anticipated bills you will have to temporarily borrow enough money to carry you until your available cash increases sufficiently.

Operating Loan
The purpose of the operating line item is to show exactly how much money you will need to borrow (acquire) in order to keep your bills paid. This number is calculated by subtracting "Expenses" (Total Projected Cash Out) from Total Cash Available.

Expenses
The next section is a list of all your categories of expenses that must be paid each month of your forecast. The line items in this section do not have to be as detailed as they are in your pro forma financial statements because many items can be combined—as long as you don’t leave out any amounts.

Ending Cash
The last line item then is your calculated "Ending Cash" at the end of each month, which, of course, is automatically the “Beginning Cash” for the following month.

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If you downloaded the sample Cash Flow Analysis previously mentioned, you will see in this example that by the second month of the analysis (forecast) you will need to borrow money (“Operating Loan”) in order to pay all of your expenses for the next seven months. After that, you have enough cash flow to not only meet your expenses, but you can pay back your operating loan as well.

Note: There are, of course, many ways to accommodate a shortfall as small as the one shown in the example, and we will discuss these in a later section—but the purpose here is to demonstrate this “system” of cash flow analysis…not any specific numbers.

This sample depicts the simplest form of “cash flow analysis," which can be one of the most important documents you should create when you have to ask the bank, or an Investor, for more money to operate your business.

The next report in this series addresses the issue of Small Business Accounting Software.

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