Understanding and Managing Cash Flow

Key to New Business or any Business Success

By Mark R. Rosenzweig, SCORE NE Mass Counselor

When I was a young boy, my mother would keep the household funds in a set of jars each with a label of what the money in the jar was for….one for food, one for the milkman, one for the butcher, etc. My father would give my mother the household funds and she would stuff the jars. When she bought something she would take the cash out of the jar to pay for it and at the end of the month she would see what was left.

Cash flow is pretty much the same thing. You start with some funds which is your investment .You keep track of what sales you make which becomes the cash in and when you add the two together you now have the funds available. What you spend on each category like rent, heat, payroll, taxes, etc are the cash outflows. At the end of the month you see what cash you have left. The more that is leftover the better. The leftover amount becomes the next months starting funds and so it goes each period.

Sounds pretty simple so why is cash flow such a big deal. The obvious reason is with no cash it is hard to pay for anything and if you can not pay your bills you either have to invest more money or go out of business. It does not mean you did not make a profit on what you sold but you may not have sold enough to generate the cash you needed to meet your expenses (called cash outflow). Many small businesses get profit and loss and cash flow confused. “I make $100 on each item I sell so I am making profit but I can not pay my bills. Why” is the often asked question? If my expenses for the month are $1000 and I sold 5 items and had a profit on each item of $100 then I had cash in of $500. So I used up $500 more then I made ($500-1000=-500). As long as I had more then $500 at the start of the month then I am still in business but eventually you run out of cash. No cash, no more business. That is why cash flow is so important.

So start managing cash flow weekly, monthly or quarterly; the smaller the time period the better if your cash on hand is small. At the start of the period, count up all the cash you have on hand (bank accounts, checking accounts, cash, etc). That becomes your starting cash. Next keep track of everything you sell. The total of all the sales is your cash in for the period. The cost of what you sold is your first cash outflow. All your other expenses for the period become the other cash outflows. Add up the starting cash and the cash from all your sales and that gives you total cash in. Add up all the expenses and the cost of goods sold and you have cash out. The difference is your final cash available at the end of the month. Assuming you have paid all your bills, and the remaining cash is more then you started with, you had a good month. If it is less, not so good.

Cash flow is a simple way to look at your business that gives you a quick and easy health check. It tells you at a glance how you are doing and if you need to change things to make the business healthier. Remember, Cash is King and cash flow is the thermometer of you business.