More businesses fail for lack of cash flow than for lack of profit. Why is this? Two main reasons: Let’s start by differentiating between profitability and cash flow: Cash flow is often calculated on a monthly basis since most billing cycles are monthly. Most suppliers will typically allow somewhere close to thirty days to pay. However, in a cash-intensive business with a lot of inventory turnover, like a restaurant or convenience store, it may be necessary to calculate on a weekly or even daily basis. How to Project Cash Flow Put it all into a spreadsheet in chronological order (our Inventors Guide has a monthly cash flow projection worksheet, or PlanWare offers a free basic cashflow planner you can use as a starting point). If at any point you have a negative cash balance or even a very small one, you have a potential problem. It’s best to be extremely conservative, i.e., estimate inflows lower and sooner and outflows higher and later. If you end up with a cash surplus, it can cover you for an unanticipated cash shortage in the future, or be invested in something to help grow your business - you won’t have a problem finding something useful to do with the money. On the other hand, if you end up with an unanticipated cash shortfall, you can end up damaging your credit, losing suppliers, having to cut employees, or out of business entirely. Track Your Actuals Keep a copy of your forecast, but track your actual cash flow as well. Comparing it to your forecast will help you realize where you have misestimated or overlooked something in your planning. Past cash flow statements and future cash flow projects are among the core financials you will need as part of your business plan for potential investors. After a few months of tracking it, you’ll also find it an indispensable management tool.
