Cash Flow Planning for a Sustainable Business
By: Paul Smith, Fargo/SE Region Center Director
The expression “cash is king” underscores the importance of having sufficient cash in a business to maintain financial stability. In fact, more than 80% of small business failures are attributed to cash flow problems. Without cash, a business can’t continue to pay employees, purchase inventory, cover recurring monthly operating expenses, or fund growth.
Statement of Cash Flows
That’s why it’s important to not only monitor the income statement and balance sheet, but also the often-neglected statement of cash flows.
While the income statement shows business performance over a period of time, and the balance sheet shows the overall financial health of the company at a particular point in time, the statement of cash flows shows how much money is moving in and out of the business during a specified period. It’s the critical link between the other two statements.
The basic formula is:
Cash Received – Cash Paid Out = Ending Cash Balance
There are four parts to the statement of cash flows:
- Net cash from operations: Includes your net income plus changes in accounts receivable, inventory, accounts payable, and income and sales tax, as well as changes in non-cash expenses such as depreciation and amortization. This section provides a true picture of the cash generated by the company before any financing or investment activities are considered.
- Investment activities: Includes both inflows and outflows from purchases and sales of long-term business investments such as property, assets, equipment, and securities.
- Financing activities: Cash received as a result of a business loan, line of credit, the sale of stock, or other capital infusions.
- Net increase/decrease in cash at the end of the period.
In addition to helping gauge whether your business has enough money to cover its day-to-day activities, pay its bills on time, and maintain a positive cash flow, the statement also informs a number of other financial decisions, such as whether additional capital is needed to fund seasonal fluctuations or purchase inventory to support sales growth.
Cash Flow Planning
In addition to “looking back” at cash flow, it’s also important to project future cash flow to anticipate when the business might need additional capital to fund seasonal fluctuations, purchase inventory to support sales growth or new equipment, and secure outside financing such as a business line of credit if needed.
Below are some tips for cash flow planning:
- Plan 4–12 weeks out (we recommend a 13-week cash planning cycle).
- Include all projected income and expenses (use the numbers in your annual budget).
- Document the timing, frequency, and method of how these transactions occur.
- Share the plan with a key team member or partner to build in accountability.
Cash flow tracking and planning are especially important for companies that use the accrual method of accounting (most established businesses). While cash basis accounting recognizes revenue and expenses when the company actually receives cash from customers or pays its bills, the accrual method recognizes revenue when it’s earned, but not necessarily paid (such as unpaid customer invoices). Until that receivable has been paid and gets converted into cash (or working capital), it can’t be used to fund the business.
We advise clients to make cash flow monitoring and planning a regular weekly task and to do it on the same day every week to monitor short-term cash inflows and outflows.
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