Controlling Cash Flow
Your Cash Flow Forecast is perhaps the most important forecast you will ever do in your business. It is the monthly estimate of the cash received and cash disbursed each month.
Cash received can come from the following sources: Cash Sales, Collection of Accounts Receivable, Tax Rebates, Sale of Capital Assets, Cash investments into the business, Proceeds of Bank Loans (Both term and credit line advances).
Cash can leave the business in the following ways: Cash expenses and purchases, Payment of accounts or expenses payable, Tax installments, Cash purchase (or down payment) of capital assets, Dividends, Loan repayments.
When a business is growing, the cash flow is one of the most important financial areas in which to plan and to manage. There are four main reasons for cash flow problems in a growing company:
- Sales growth does not come quickly enough for the increase in overhead.
- Accounts receivables absorb too much cash.
- Inventory levels grow and absorb excessive cash.
- Too much working capital (cash) is used to finance a fixed asset.
Ramp-Up
This concept is critical both in business start-up and in businesses that grow and experience an increase in overheads for the business, such as increased staff, equipment lease, advertising or other fixed costs. It means the core amount required to run the business every month. This cash goes out regardless of the level of sales. We can look at this graphically in the diagram below.