Year's End Money Matters: Small-business cash flow

By James McCusker
Courtesy to The Bellingham Business Journal

Most entrepreneurs know that ineffective cash management is one of the leading causes of business failure. It is also often the cause of hasty decisions regarding equity and debt — decisions they will often come to regret.

In good economic times and bad, cash flow is almost always an issue with small to medium sized businesses. Recent changes in our economy — including collateral damage from the federal government budget battles — are raising it to major headache level. Beyond this temporary situation, though, smaller companies are routinely horsed around by big corporations and government when it comes to paying their bills on time.

If you haven’t used your cash flow model recently, it should be dusted off, updated, and re-validated. If you don’t have a working cash flow model at all, this would be a great time to prepare one.

There are two kinds of cash flow that you should know about; one deals with the past and the other with the future. The first, the Cash Flow Statement, is one of the three essential parts of your financial statement and addresses two questions about your business: Where did the money come from and what did you do with it?

The other cash flow report is a model that addresses a different set of questions: how much money do we need to make payroll and our other expenses next month? It allows you to forecast the cash needs for your company — daily, weekly, or monthly, depending on your requirement. Because of the coming economic pressures on cash, forecasting your future needs should be given a high priority on your “to do” list.

The good news is that cash flow forecasts for smaller businesses are not that demanding in terms of accounting or math skills, and, even better, they are both informative and kind of fun. If you have never done one before, the Small Business Administration (SBA), through their Service Corps of Retired Executives (SCORE), has some templates that you might find useful. Their 12-month cash flow forecast template may be found at . Also, most accounting software packages for smaller businesses have a cash forecast report already built into their system and provide instructions on how to set it up.

The greatest value of a template, or a software package, is in getting you past the dreaded “Inertia of The Blank Page,” which often dooms projects undertaken by busy managers and entrepreneurs. As useful as they are, though, neither a template nor canned software will do your thinking for you. There is no substitute for your knowledge of the business when it comes to cash forecasting.

It is probably best to start by taking a look at last month’s cash outlays. List the payments by type — suppliers, utilities, bank loans, taxes, payroll, and any other expenses that came up. You may find payments for non-expense items and for items paid for up front that are expensed over a longer time period. Use your common sense and your knowledge of the business when deciding which payments are one-time cash outflows and which ones come due periodically.

Your check register can be used to ensure that the cash outlays for the month, less the one-time payments, equals the amount shown in your cash flow statement. This validates your model initially and gives you a starting place for the forecast.

Using a spreadsheet such as Excel at this point will make the forecasting model easier to calculate as well as more useful. Last month’s cash outlays become the first data column in your spreadsheet. You can organize it to fit your business and your forecasting needs, but initially, at least, you will find it useful to group your outlays into recurrent and non-recurrent payments.

You may find it useful to split up the recurrent expenses into monthly and non-monthly. Some taxes, for example, are recurrent but come due quarterly rather than monthly. Others are due in a matter of days after payroll.

Taxes are often the source of cash flow problems for businesses, and making sure that they are included in your forecasting system can avoid a situation where you cannot make a payment on time. Unless you have borrowed money from the mob and can’t pay it back, nothing will get you into trouble faster than missing a payroll tax payment to the Internal Revenue Service.

Your knowledge of the business becomes they key to forecasting its cash needs. That, along with the monthly, quarterly, and seasonal cycle information you can calculate from your payments history, will form a solid cash flow forecast. It is an important step in managing your business instead of your letting your business manage you — and it’s well worth the effort.

James McCusker is a Bothell economist, educator and small-business consultant. He can be reached at His columns are also regularly featured in The Herald Business Journal in Everett, Wash., a partner publication of The Bellingham Business Journal. 

This is the third of four installments featured this week on that offer year’s end financial advice for business and personal life. Contributing writers’ columns are also featured in the December edition of The Bellingham Business Journal. 

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