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Three important documents - the one that means the most

The projectionary cashflow chart

Two columns ago we stated that we were going to discuss the three most important financial statements for a business – each column would discuss one of the statements and we would begin with the least important and conclude in this article with the most important statement.

We opinioned the profit and loss statement was the least important because as a monthly or annual report it was purely historical. The data in a profit and loss statement was in essence a short term report card on the business. With good or bad results being shown, the business owner can work to make the next statement continue or improve on the results shown.

The second document was the balance sheet. While it is also historical, it gives the reader information about the financial strength of the business going forward. If the business has built a strong position over several years, the business will be able to endure during most short term economic challenges.

This column we examine what this writer believes is the most important financial statement of any business. Yet, the experience of this writer is that few businesses utilize a projectionary cashflow statement while most are unaware of the existence of such a tool.

The projectionary cashflow statement is the most important because it illustrates the future of the business. The statement will tell you if the business will be able to meet all of its financial responsibilities over the next 12 months. While the accuracy will begin to diminish, a projectionary cashflow statement can be created for an even longer period of time.

The value of the document comes as the owner of the business has the opportunity to make changes in the business over a period of months so as to change the outcome. Envision knowing that your business is going to be short of cash some 10 months from now. This document tells you of that shortage today, the amount of the shortage, and with that information you can work to make changes to improve the cash position.

As an example, foreseeing a cash shortage you could consider looking for operating expenses to decrease as well as improving your inventory control so that you diminish your cash exposure. If making changes such as these do not put the business in a cash positive position, making sure the business has an available line of credit could do much to resolve business tensions often felt by an owner in similar situations.

Creating a projectionary cashflow statement begins by creating a budget for the business. A budget is simply a projection of the profit and loss statements for the duration of the cashflow chart. A budget looks exactly like a profit and loss statement; it is just looking into the future as compared to being historical.

For the projectionary cashflow chart, you need only the net profit and cost of goods sold from the budget you have just created. The calculation to know the anticipated cash on hand involves this sequence:

Anticipated cash on hand first of month
+ Net profit
- Cost of goods sold
- Inventory you anticipate to pay for during the month

You then take into consideration items that affect your cash position. As examples, if you anticipate your accounts payable decreasing, then the cash position will diminish by a same amount. If your accounts receivable diminish, that would indicate you anticipate collecting additional funds and your cash position will increase by a similar amount. Any situations in which you pay for fixtures or equipment will result in your cash position diminishing. 

The resulting number will be the anticipated amount of cash on hand for the end of the month. This same number represents your anticipated cash on hand for the beginning of the next month. Repeating this sequence for 12 months creates a projectionary cashflow chart for the next year. You would know how much money and inventory your business would have for every month of the coming year.

Of course, you would want to review the information on a monthly basis, and your projection is only as accurate as your ability to estimate. But the best businesses are those in which the owner or manager is most able to anticipate their customer’s wants and needs. This tool helps you make those plans as well as teaches you how to better manage your business.

Tom Shay is a fourth generation small business owner providing proven management and business building ideas through his Profits Plus Seminars, Profits Plus Solutions coaching, books authored, and articles written. Tom can be reached at 727-464-2182 or through his web site:

Profits Plus Solutions, Inc.
PO Box 1577
St. Petersburg, Fl 33731
(727) 464-2182
Fax: (727) 898-3179