Effectively Managing Your Cash Flow in Your Business

The Cash Flow Statement is derived from the Cash Flow Budget, which is a forecast of receipts and payments. The Budget shows if enough cash is available for expenses, equipment and goods purchases. Cash Flow also indicates whether external sources of cash are necessary. While many business owners think profits are the most important financial component of a company, the lack of cash is often the biggest reason for business failure. In fact, a business may be profitable; yet, it doesn’t have the liquidity to pay its expenses. Therefore, effective Cash Flow Forecasting, Planning and Management are essential to a Company’s success.

Planning is short-term (daily/weekly), as well as, long-term (monthly/quarterly/yearly) so a business has the optimum amount of money on hand when required. The Budget controls the flow of funds into your business to make necessary payments, while not maintaining an excessively high Balance. It is a function of Management because the efficiency, speed and effectiveness of moving money through a business enables the business owner to turn it over into sales and income more quickly, resulting in greater profitability and minimized interest payments.

The Cash Flow Statement can be a complicated Financial to develop and manage. Therefore, the Budget is a great place to start and is a very effective tool to manage your business cash flow. The Budget has three principal sections to manage:

1) Money to be received
2) Expected Payments
3) When payments are to be made

The monthly Budget is the primary Cash Flow format. We recommend working on three months at a time and build out the Budget for 12-18 months projected in advance. Each month should have a Budget Goal and Actual Column, and the Budget should be on a rolling basis (as you complete a quarter, budget another three months).

The first bottom-line for the Budget is the End of the Month Cash Balance, which is computed as follows:

Beginning Month Cash Balance + Total Cash Receipts – Total Cash Payments

Simply put, a negative balance will require an increase in receipts, a decrease in payments, or accessing a short-term loan. The second bottom-line is the End of Month Available Cash, which is calculated by subtracting the Monthly Contingency Cash Desired and Short-term Loans required.

The third bottom-line is the Cash Required for Capital Investments, which is calculated by taking the End of Month Available Cash and factoring in Desired Capital Cash and Long-Term Loans Required.

By effectively Planning your Forecast and Managing the various key elements of the Budget, a business owner can determine the right amount of funds available, when needed. Please refer to the end of this Article for a Budget Worksheet to assist you in Forecasting, Planning and Managing your Company’s Cash Flow.

Having constructed your Budget, you can now effectively manage your Cash Flow needs. By using some numbers from your Income Statement and Balance Sheet, you can analyze your present cash situation and apply that to future analysis. It is important to understand the relationships between your Financial Statements in order to effectively Manage, Plan and Forecast.

David Worrell of Entrepreneur Magazine has some very useful information in his article “Keeping Tabs on Cash Flow” (January 2009) on simple ways to use Cash Flow formulas to effectively manage a business…

A couple key formulas will help you predict and manage sales related issues:

1) The Average number of days to collect money from customers or the Days Sales Outstanding (DSO):
(Accounts Receivable divided by Annual Sales) x 365

2) The Average number of days to pay your bills or Days Payables Outstanding (DPO):
(Accounts Payable divided by Annual Sales) x 365

So how can the DSO and DPO be applied to your business situation?

1) If your DPO is greater than your DSO, you can carry or float your bills longer than your customers do and cash will accumulate.

2) If DSO is greater than DPO and your customers are slower in paying their bills, then money is departing the business.

3) When DPO is greater than DSO, the bigger the difference, the more funds are flowing into the business and vice versa.

4) The difference between DPO and DSO, termed the Float, is the number of sales days in cash that is flowing in or out of the business each year. The equation is:
(Sales divided by 365) x Float

a) As an example: A $1.5M Sales Revenue business with only eight days of negative float will see $33,000 in money go out the door. This problem can be compounded if the drop happens during one payment cycle.

So how can you fix negative cash flow? Well, it is really pretty simple. A couple options:

1) Collect receivables more quickly from customers.
2) Obtain better payment terms from suppliers.

Combining options one and two will exponentially increase your flows, putting much less strain on your business operations and allowing you to manage more effectively for Profits.


In order to effectively manage Cash Flow in your business, you must understand the relationship between your Cash Flow Statement, Income Statement and Balance Sheet, and what these financials are telling you. The Budget is the first step in developing your Cash Flow Statement, utilizing the numbers generated through your Profit Analysis and Income Statement and your Balance Sheet. The Budget is a great tool to manage and plan your levels of Cash Flow (please see an example Cash Flow Budget Worksheet below).

Monthly Cash Flow Budget Worksheet Example
[ Monthly Basis; Budgeted and Actual Columns ]

Expected Cash Receipts:
1. Cash Sales
2. Accounts Receivable Collections
3. Other Income
4. Total Cash Receipts

Expected Cash Payments:
5. Purchase Goods & Equipment
6. Salaries
7. Utilities
8. Depreciation
9. Rent
10. Building Services
11. Insurance
12. Office Expenses
13. Interest
14. Sales Promotion
15. Taxes & Licenses
16. Maintenance
17. Delivery
18. Misc
19. Total Cash Payments

Cash Balance:
20. Beginning Month Cash Balance
21. Cash Change (item #4 minus #19)
22. End of Month Cash Balance
23. Desired Contingency Cash Balance
24. Short-Term Loans Required
25. Available Cash- End of Month

Cash for Capital Investments:
26. Available Cash- End of Month (line #25)
27. Desired Capital Cash
28. Long-Term Loans Required