Entrepreneurial Success: Cash Flow Management (III) – By: Musbahu El Yakub

In this series, we’ve covered the cash flow cycle so far, some key working capital and cash flow management terms, and the importance of careful cash flow management. We’ll finish the cash flow projection today and introduce some principles and practices for managing cash flow wisely.

Cash Flow Projection “Template”: A simple cash flow projection table for a small business will essentially consist of multiple rows and columns of cash receipts and payments. At the top are cash receipts which add to the total cash receipts for a period, say, a month or a year. Individual receipts may include cash sales receipts, debt collection, loan proceeds, etc. These are added together to give you the total cash inflow for the period. Below the rows and columns for cash inflows, you will have another set of rows and columns for cash outflows. Individual cash outflows may include purchases of materials and supplies, payment of wages and salaries, interest payments, principal loan repayments, etc. These are also added together to get the total outflows for the period. The total outflow (“B”, in the table below) is deducted from the total inflow (“A”, in the table below) to obtain the net cash at the end of a period. Net cash at the end of a period is carried forward to the beginning of the next period as opening cash.

It should be noted that the specific composition of sources of cash inflows and outflows may be unique to each company. Therefore, you must establish your own cash flow projection table to meet your own plans, requirements and realities. The table below is an example of what a simple cash flow projection table might look like.

There are several simple, free cash flow projection templates available on the Internet that can be adapted to meet your needs. However, if you have just learned how to develop a cash flow projection or are not yet proficient, I strongly suggest that you first learn how to build it manually and then move on to using Excel before you start using the adaptable templates on the Internet. Equally important, you can hire an accountant or business consultant to help you through the exercises until you fully understand what might go into the cash flow projection table, how, when, and which won’t. . This is very important so that you become very clear about what it takes to do the throws in various situations. Once you are very comfortable, you can start using the templates.

Principles and practices of sound cash flow management: I find three variables particularly important in the management of most businesses. These are profitability, cash flow and growth. In its simplest form, profitability is when your sales revenue is greater than all of the costs attributable to delivering your products or projects to your customers over a period of time. In the short term, a business can survive and even grow with little or no profitability as investors and creditors continue to provide needed cash. But that’s usually not sustainable in the long run. The immediate and long-term survival and growth of a business can only be sustained by being profitable and with positive cash flow. As is often said, cash is truly the lifeblood of a business. Some of the principles and practices of sound cash management include:

• You must be able to make intelligent and realistic projections about the economy, your industry, your business and the market.

• You must keep complete and accurate financial records. Specifically, you need to generate cash flow projections based on your plans, operational realities, and the market.

• You must remain mindful of the objective of maintaining positive cash flow even as you strive to maximize the profitability of your investments and operations.

• Be alert and prepared for periods of negative cash flow based on your projections. In such situations, you should either plan to cover the gap in advance or reduce some exits.

• Minimize credit sales and associated risks. When you must make sales on credit, you must have clear and firm policies and actions regarding credit control and debt collection.

• Evaluate your customers and limit trade credit to those who deserve it. Even if you do this, you should also ensure that you have contract documents to protect your interests.

• Always expedite collection of your receivables and be friends with your customers’ payment agents.

• Don’t wait for due dates to follow up on payments with your customers. Instead, start officially reminding them of upcoming payments days and weeks in advance!

• Negotiate to take advantage of your suppliers’ trade credits and delay payments within the time available to you, but certainly without default.

• Your operations and the technology you deploy should help you make it easier to receive payments.

• Establish a good relationship with your bank and make sure you get a backup line of credit.

• Monitor and reduce the tendency to tie up cash in inventory and even fixed assets.

• Think through and evaluate every investment and payment you make. Negotiate and get favorable payment and repayment terms that let you breathe easy.

• Safeguard your money with every payment you make and eliminate waste.

• Where appropriate, consider leasing rather than outright purchasing of assets.

• Regularly review your financial and cash position.

With these we finish this series and next week we will discuss Providing Leadership.

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