Session 1: Getting financial controls in place

Cash flow

As you grow, your cash flow will become more complex. This will surely be the case if your expansion includes creation of debt to fund your growth. Most business failures occur because the cash flow fails to cover debt created in acquisitions or other expansion costs.

Cash flow control is a simple method of projecting your future needs for cash. It is an income statement covering future periods of time that has been changed to show only cash: cash coming in and cash going out and what your balance of cash is at the end of designated periods of time.

In cash flow control, for each future intervals of time, make conservative estimates for your future sources of cash (IN) and future expenditures (OUT). Use low, conservative figures for IN items and use high estimates for OUT items. For the initial period, start with the cash you now have. To this you add IN items and subtract the OUT items, which results in the cash at end of the month. The cash at the end of month becomes the starting cash for the next month.

Your cash flow projections will furnish the information on how much debt you can safely

take on. You may want to establish a guideline ratio to establish a margin of safety between your cash flow and your debt service. For example, limiting your outstanding debt service so as to maintain cash flow that is three or more times the debt service. To estimate a reasonable ratio for your particular business, your public competitors are a good place to look for industry norms.

Any time you were to run out of cash, you would have a potentially disastrous problem. So the number one safeguard in building your business is: never run out of cash. By having information of potential negative balances in advance, say six months, you have six months to make cash flow adjustments in sales, collections, expenses or financing to correct future negative balances.

The following simplified cash flow control spreadsheet shows that ending cash for this first period becomes the starting cash for the second period. The ending cash for the second period becomes the starting cash for the third period, and so on. The projection will also be a useful tool in arranging financing and demonstrate to your banker that you are sensitive to the importance of safeguarding liquidity as you grow your company.


Category: Forex

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