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Effective Cash Flow Analysis: Small Business Bookkeeping

Small Business Bookkeeping: Use Effective Cash Flow Analysis

Cash flow is definitely the lifeblood of your growing business. In fact, it is what keeps you in business. To be a success in business, you must be able to keep your finger on the pulse of this lifeblood – it can be the difference between growing stronger in your niche or faltering and falling by the wayside. Cash flow must be monitored and forecasted at the initial beginning of the business or during the start-up phase, when the business sees an increase of sales, and when the economy is in a downturn. Simply put, cash flow analysis can be a beneficial instrument for measuring your business’ activity.

Identifying Potential Land Mines

You can easily identify potential financial land mines that will set your business back by developing a cash flow spreadsheet. There are computerized spreadsheet programs that you can use to create a cash flow analysis, or you can build your own using a basic program like Excel. There are also templates that can be used for your cash flow analysis that you simply populate with the right figures. The cash flow analysis tool that you choose to use should be utilized and then monitored regularly. Most business owners report doing a weekly analysis of their business’ cash flow, but you can choose a different schedule if you wish, such as bi-weekly or monthly. The important thing is to be consistent and regular. As a business owner, you should fill out this analysis yourself, or delegate the task to your accountant.

How to Prepare a Cash Flow Analysis

To begin preparing your cash flow analysis, start your spreadsheet by adding the cash-on-hand at the period’s beginning with the cash that is anticipated to be received from other sources. This will be a projected total of income, including receipt of accounts receivable and cash sales. 

The next part of the cash flow analysis consists of cash outlays, including expenses and other anticipated cash that will be spent by the business. Each significant cash outlay should have its own individual line on your spreadsheet. This includes lines for rent, inventory purchased, wages, salaries, taxes withheld or payable, equipment purchased, benefits paid, sales, office supplies, advertising, equipment maintenance, fuel, cash dividends, debt payments, and so on. 

The formula for cash analysis is: beginning balance for the period + cash flow = ending balance. The ending balance will allow you to identify when and for how much your cash flow will be deficient, if at all. Identifying cash shortages and when they will occur will allow you to combat the problem and take steps to bring in more cash to the business while halting the outflow of cash wherever possible. If you find that your business may experience a cash shortage when doing your cash flow analysis, you can take steps like asking for interim payments or deposits from clients, utilizing the use of a retainer if your business model calls for it, and invoicing customers right away when a service is rendered or a purchase is made. 

As you can see, the cash flow analysis is a valuable tool for all business owners.