First, a reminder… Don’t forget to organize all your “C” files today (as described in the Alphabet Strategy post a few days ago).   Now on to our next letter…

Dec 3.  “C” is for Cashflow

In any business Cash is King… the cause of most business failures is running out of cash.

For big companies that have large staffs of financial people to stay on top of cashflow, this can get to be a complicated subject, but for our small business purposes we can simplify this…

Cashflow in the timing of your income and expenses over time.  In a nutshell, cashflow is your bank balance projected into the future.  If you have an accounting system and you enter in future income (receivables) and future expenses (payables) on the dates that you expect to see the money or pay the money, then you will have a rudimentary idea if you have cash flow problems in the future.

I use Intuit’s Quicken program for keeping up with this.  Everything up to today is my actual bank account transactions and balance.  It  includes any other bank accounts like credit cards, lines of credit etc.  But there is more than just past transactions and reconciled amounts.

Future Banking…

There are entries in my Quicken account for the next twelve months into the future as well. 

For all income that is due to my business in the future, I have a planned deposit shown on the day that I expect to receive the money.  As things happen to change either the date that I expect to receive the money, or the amount, I change them in the Quicken account.  This also gives me a quick heads-up every month of what I expect to be paid in the near future so I can start asking about it and checking to make sure there are no surprises.

For all expenses that I know about, I have a planned withdrawal from that account on the day that the money is going to be due.  I put my Payroll expenses (salaries and taxes) into the account for the next twelve months. I also know what my approximate monthly expenses are, so I have a placeholder entry on the 3^rd of every month that shows just as Monthly Expenses and it is for the average amount of our expenses. 

Action tip for those reading this: Figure out a good estimate of exactly what your expenses are per month and keep up with this in a spreadsheet. You might be surprised at what you learn.  Question each expense at least once a year to see if there are ways to reduce it.  Even a little thing like changing your cell phone plan to one that is $60 a month cheaper saves $720 a year.  And bundling your phone, DSL, etc could save 10%… be on the lookout for potential savings…

Having all the future income and expenses in this account allows me to project my cash balance into the future as far as I want.  Note: I do not enter forecasted income amounts only those I know are real income.   This keeps me from fooling myself with rosy projections of income that may or may not happen.   This allows me to look and see where any shortfalls in cash are going to occur, how deep they are and how long they are likely to last.

If there is a major cash crunch at some future time, I can start doing everything possible to generate new income before the crunch occurs, or to speed up some receivables to earlier dates, or to reduce short-term expenses, or to defer some payables into the future.  If you can see into the future 6-12 months it is a lot easier to take small steps now to avert the cash crunch.  If you wait till it is too late, then you need to take much more severe actions.

One other thing… we have a business credit line attached to our account, and we use this for one purpose only.  If we have a temporary cash crunch, we can take money out of the credit line on a short-term basis to cover the required shortfall.  Whenever I access the credit line, I also put the payable into the account at the earliest time when the cash will be available to pay back the short-term loan.  Usually this is within 15-30 days tops, sometimes it is only for a day or two.

In changing times, it is important to have an accurate picture of our Cashflow projected into the future.  It allows you to manage this vital resource, and it allows you to concentrate on other things knowing that this issue is taken care of…

Tomorrow, we will move to “D” and we will be discussing your “Desk”…