Erie, PA (PressExposure) April 21, 2009 -- What is the most important function a small business owner can perform to ensure survival through this tough economy? Without a doubt, says Bruce Van Cleve, it is managing the finances within your business, the finances that happen after the sale is made, with the emphasis on how cash flows through your business. "Cash is King" is an old clichÃ©, but never as important as it has become in this economy. Managing the cash flow of your business is the new essential skill you need to learn quickly to survive in this economy.
Most business owners focus on getting sales and let the internal workings of the business handle it from there. This is a costly mistake. Learning to survive requires looking within your company, to what is going on inside- after the sale. The key is to focus on not the accounting per se, but the cash.
Looking at the business from a cash flow perspective means not relying solely on the accounting system, which can only look at the history. Accounting can only tell you what has happened in the past. The smarter way is to look ahead and plan for future profits and cash. This means putting together a cash flow forecast. It means seeing the future, not the past. It means seeing the cash crunch coming well in advance- in time to do something about it.
A cash flow forecast plots the collection patterns of money owed you, and combines that with the payment pattern of your payroll and your bills, and arrives at a month-by-month flow of cash for the next 12 months. This plan gives what you the owner needs most; a sense for what the near future has in store for the business. Armed with this knowledge, planning and decisions become calmer, more thoughtful, more proactive, and less reactive.
This is not the same as a traditional budget; in fact, it's not the same thing at all. Budgets are static, remaining un-changed and a comparison is made each month of actual to budget. In a cash flow forecast, you replace the forecast with actual numbers as you go, and change the forecast as circumstances change. The point is to see ahead more clearly based on facts on the ground.
A cash flow forecast could be made with a spreadsheet or with specialized software that comprehensively makes a complete forecast of cash flows, income statements and balance sheets. Van Cleve uses the specialized software, he says that to be complete, forecasted Balance Sheets are needed to ensure the other parts of the plan fit together and make mathematical sense.
This recession is largely the result of a credit crunch, which has left banks reluctant to lend, and individuals reluctant to spend. Without the oil of available credit for working capital, the machinery of commerce tends to grind to a halt. Many companies rely on an operating line of credit to function. Very conservative business owners fund their own working capital needs from past profits. This cash flow forecasting is one of the best ways to accomplish that.