How to monitor your cash flow

Published 10:32 pm Tuesday, September 11, 2012



You may have assets, income and profits. If you run out of cash, however, everything stops. It’s like running out of gas.  To avert a cash crisis and ensure that you always have a safety cushion, you should know in advance how much cash will remain. Monitoring cash flow is a matter of following some common-sense rules.
First, it is important to understand that income and expenses are not necessarily cash. If you sell goods on credit, your profit and loss statement shows this as income, but it is not cash until you collect. Also, buying goods on credit is an expense, but is not a cash reduction until you pay.
The process to monitor cash flow starts with forecasting. A computer spreadsheet is most helpful — it will make it easier to edit and update — but paper and pencil will do. Looking ahead one year in monthly periods should be enough. Each month should have two columns: one for the forecast and one for the actual amounts as they occur.
The rows should have four sections: beginning cash, income, expenses, ending cash. The beginning cash section includes cash, banks, subtotal. The following section includes cash income for that month organized into categories and large ticket items, and a subtotal. Don’t be too detailed. Details create the illusion of accuracy and are distracting. This is an estimate — round, large numbers are best.
Follow with a section on cash expenses, separating fixed or recurrent expenses from discretionary expenses because you can choose the timing of discretionary items. Again, avoid too much detail.  Sub-total expenses. Your final section will be end-of-period cash, which is your beginning cash for the month, plus income less expenses. This end-of-period cash becomes the beginning cash for the next month. Do the same for each month.
When you finish your table, check for errors and analyze it. The result shows at a glance your cash position at the end of each period. Are you happy with the cushion? Think of ways to increase cash income (for example, collect receivables or ask for advance payment). What expenses can be reduced or postponed?
Update your forecast at least once a month. At the end of each period, write the actual amounts in the second column under the month. Analyzing discrepancies between forecast and actual will help you make better estimates in the future.
This simple exercise should help you avert a cash crisis.

SCORE is a national, nonprofit organization that offers confidential and free counseling to small businesses. Locally, contact SCORE by leaving a phone message at 252-974-1848, by visiting the website at or visiting the office on Tuesday and Thursday mornings in the JobLink building, 1385 John Small Ave., Washington.