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Polishing the Crystal Ball

Utilizing a Cashflow chart

You have undoubtedly had occasion where you have identified a trend within your business that began several months or even years ago. In identifying the trend, positive or negative, you are aware today of how you could have taken advantage of the situation if you had known the trend was developing. Unfortunately, you see it only as you review your past financial statements.

Many businesses have developed the habit of gathering various financial data each month, passing the information to an accountant or data processing firm, and then waiting for financial reports to be delivered. Often this report is received more than 30 days after the end of the month.  

To make matters worse, when the report is received, our example business owner will examine the gross revenue, net profit, gross margin and maybe one or two expense lines that have been reason for previous concern.  The financial reports, usually a balance sheet and a profit and loss statement, are then filed away.

These two financial reports are the first two essential components of sound financial management.  The third component is the cash flow chart, which is created by taking key bits of information from those financial sheets. A cash flow chart, whether created on a ledger pad or utilizing a computer spread sheet program, begins with the cash in the account on the first day of the month.  Add to that, the profit for the month. Then subtract from that the dollars spent for inventory, leaving a figure that will represent the cash on hand at the end of the month.

Using a program such as Microsoft Excel, the business owner can develop an elaborate cash flow chart.  He can input the previous twelve months of financial sheets and begin to make forecasts for the next 12 months.  By changing from the historical figures of sales, margin, and inventory levels, to projected figures, the business owner can anticipate the necessary cash flow.  As updated figures are entered each month, the near future becomes easier to predict and additional months can be added to the spread sheet so that there is a constant 12 month forecast.

Businesses that are using an accrual basis for accounting can further use a cash flow chart to calculate their purchases of inventory, equipment, and other expenditures which will be paid for in the following two to twelve months.  Too often a business, riding the crest of increased sales, over extends itself in purchasing inventory or making improvements to the facilities.  A cash flow chart would quickly show a business that the appearance of excessive cash today is actually the dollars necessary for the next few months.

It is important in using a cash flow chart that it be kept up to date.  One dealer reported he had spent a sizeable amount of money having an accountant create a cash flow chart.  During the first three months of the year, he was awarded several service contracts, causing him to underestimate sales by some 50 percent.  His comment was that the cash flow chart did not work for him.  The actual problem was

the accountant failed to explain the cash flow chart was information that needed to be updated monthly.

While this problem may appear to be one that many businesses would like to have, it could be a leading cause of business failure if the collections, purchases of equipment, and salaries are not supported by a substantial cash reserve or a line of credit.

While the situation of the above dealer does not occur frequently, for many dealers there will undoubtedly be months where there will be cash flow excesses and shortages, as few businesses have the same level of revenue each month of the year.

The idea of a business creating a cash flow chart is not to replace the accountant being utilized.  If the dealer in the previous example were in need of a line of credit, the services of an accountant would be crucial in creating the proper documentation for a bank.

Unfortunately, many accountants are looking at a business from a historical perspective as compared to the position of a visionary.  Both positions are necessary, but the business owner and the accountant can not both look at the situation from the same perspective all the time.

Another factor to be concerned with is the timeliness in which the cash flow chart is created each month. Simply stated, if you want to be able to affect business in August, you need to complete your July cash flow chart within the first week of August.  

This sample of information is an example of utilizing a cash flow chart to assist in creating "what if" scenarios.  In addition to this example, a cash flow chart can anticipate the effect of a sales increase, a change in gross margin, or extended dating on the net income and cash position.

You may have thought the crystal ball only appeared in fantasy movies.  But, the cash flow chart is a far superior way to see the future of 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