Cash Flow Planning: Understanding the Basics

Are you afraid to look at your cash flow situation? Or maybe you don’t know what to do about it, but you already know there is a problem. I’m going to make a “wild” suggestion. Maybe you do want to know what’s contributing to the results you’re currently observing. Your c^sh flow picture is a report card on how you’re managing your business.

I take a very strategic approach to cash management. Since Actions produce Results,, it makes sense to look back at what the Actions were that produced current Results. If cash flow is an issue now, by knowing what Actions (or lack of Action) led to the current Results, you’ll be in a better position to plan Future Actions.

One of the Key Operating Systems in any business is Cash Flow. When looking at the cash history of a business it’s always helpful to review the decisions and actions that had an effect on cash along the way.

One of the main objectives in business operation should be to manage cash very carefully and conserve it whenever possible. That may mean the decision to rent a space you could grow into may not have been the smartest decision from a cash standpoint. Unless you can temporarily bring in additional income from the extra space, you’re adding an unnecessary drain on your cash flow each month. It’s always wise to consider the cash consequence, as well as other consequences, when making such decisions.

In its simplest form cash flow is really the inflow and the outflow of money through your business. The inflow must consistently be greater than the outflow in order to maintain a healthy business.

Inflows generally come from sale of goods and/or services, equity capital and loans. Outflow goes toward payment of costs associated with goods or services sold, operating expenses, taxes, debt and other liabilities incurred in operation of the business. To the extent possible, you want sales to produce more than enough to cover all expenses. Unfortunately, sometimes for a growing business that isn’t always possible, so debt must be an option when and if needed.

To the extent that you can accurately project inflow and outflow demand, you can take appropriate Actions to get the Results you want. If you know it takes 90 days, on average, to collect on sales delivered, you will have to cover the costs of selling, producing and delivering before you will be paid for them. If you don’t have a cash reserve to call upon, a loan or equity capital will probably need to be provided in the interim. If this is the model on which your business operates, you must take this into consideration in cash planning. Of course, repayment of debt incurred, must be calculated into future cash requirements.

If your business is cyclical, meaning the bulk of income is received in waves or spurts during the business year, you will have periods where you will either need to borrow or call from a cash reserve (if you have one). In order for a business like this to keep operating you will want to plan carefully. Try to get big expenses (like insurance premiums) to fall into the high income part of your cycle. This can usually be negotiated if you deal with it upfront rather than waiting for it to become an issue.

One critical Action you can take that will make a positive impact on your cash flow Results is to create a monthly projection of your fiscal year’s cash flow. You can think of cash flow management as being similar to managing your check book. You start with your cash balance at beginning of the month; then take into account all the inflow and outflow during the month and then check the balance at end of the month.

One of the most critical elements is your sales forecast. The case study at will give you an example of how one company set up its cash receipts projection.

Costs to sell, produce and deliver your product or service account for Cost of Goods Sold. Knowing when you incur these costs in the sales and receipt cycle will allow you to know if you may need additional support on an interim basis. Obviously, at some point the money must come in to cover these costs, plus enough cash left over for all other operating expenses. It may be helpful to view the Cost of Goods side of our case study (above),

Other operating expenses make up another major element of business operation. Some expenses are probably fixed, like rent, lease payments, etc. Others will vary from month to month like phone, utilities, etc. Still others will occur from time to time, like insurance premiums, repairs, major purchases. As much as possible, plan for large expenses to occur when higher cash inflow is expected. But if you don’t do your c^sh projections, you won’t know when that will occur.

Debt repayment is not part of operating expense, nor are taxes. But they are a draw against cash, so in cash planning, they must be accounted for.

Here’s a summary of what we’ve included:

Cash Balance Beginning
Income from Sales (in)
Loans, as needed (in)
Cost of Goods (or Service) (out)
Fixed Operating Expenses (out)
Variable Operating Expenses (out)
Major Purchases (out)
Taxes/Debt Repay (out)
Cash Balance End

If Cash Flow Planning is somewhat new to you it may be helpful to try short term planning for a couple of months. A good example from the SBA is online at, Don’t let the terminology throw you. It’s the concept that counts.

Once you get used to planning your Actions with specific Results in mind, you’ll be well on your way to being in control of the cash in your business.

Assignment: Using the outline above, consider historical expenses in these categories, consider Actions that are planned for the near future and how they will impact on cash, then do a rough estimate of the inflow and outflow of cash over the next two months. It’s a good start and you might be surprised at what you learn.