The Art of Cash Flow
By John Stivers, Broker
Professional Business Brokers, Inc.
Don’t let your company’s tank run dry….
One of the most important business disciplines is Cash Flow Analysis and Management. We hear about it all the time, but most of us ignore it. Or we go through the motions on a day to day basis, without preparing and analyzing like we should.
So what is Cash Flow anyway? You know when your husband or wife carefully extracts a twenty dollar bill out of your wallet or purse…well that is Cash Flow! The cash done flowed right out of your possession into someone else’s possession and most importantly, you didn’t realize it until you were looking for it in order to pay the clerk at McDonald’s. Maybe you have another twenty stashed away in a secret compartment of your wallet or purse…that would be Cash Management and only you will know how close you came to complete embarrassment. On the other hand, it could have just as easily been your only twenty, at which point you apologize and scurry away aching with hunger pains.
Another example is driving our cars. Gasoline or fuel must be important because the auto manufacturers decided we all need a big old gas gauge right in front of the driver. You can’t miss it. In many cars it is at least as big as the speedometer. On some of the newer cars they went even further. Just in case you can’t read a clock face, they gave us a nice digital readout. This readout will calculate how far you can go on the remaining gasoline. Heck, it even counts down until you flat run out! But that’s the point isn’t it? The car will only run as long as it has gasoline or fuel. Businesses will only run as long as they have fuel and that fuel is cash!
Cash Flow is essentially the movement of money into and out of your business; it’s the cycle of cash inflows and cash outflows that determine your business solvency.
Cash Flow Analysis is the study of the cycle of your business’ cash inflows and outflows, with the purpose of maintaining an adequate cash flow for your business, and to provide the basis for cash flow management.
Cash Flow Analysis involves examining the components of your business that affect cash flow, such as accounts receivable, inventory, accounts payable and credit terms. By performing a cash flow analysis on these separate components, you’ll be able to easily identify cash flow problems and find ways to improve cash flow.
A quick and easy way to perform a cash flow analysis is to compare the total unpaid purchases to the total sales due at the end of each month. If the total unpaid purchases are greater than the total sales due, you’ll need to spend more cash than you receive in the next month, indicating a potential cash flow problem.
This is a process that we use every day in our lives. We are subconsciously analyzing our personal financial affairs as we go through each day. It has become second nature to us. Most of us are pretty good at analyzing, budgeting and making intelligent decisions. Others of us are not so good and run up the credit cards in hopes that the problem will go away. By the problem most likely won’t go away. It never should have happened in the first place. Good business management demands that a careful and analytical study be made of available cash, receivables, payables and debt service in order to know what is required and take the necessary actions to ensure that sufficient cash is available to make your commitments.
Those of you that use QuickBooks should find a report option under “Company Financials” for Cash Flow Analysis and Cash Flow Forecasting. Also for those of you that are MS Office 2003 Excel aficionados, Microsoft offers several free templates that are business oriented. The one for Small Business Cash Flow projections can be found at the following URL: http://office.microsoft.com/en-us/templates/CT011377041033.aspx.
Often business owners get complacent about their businesses. They have most likely owned and operated the business for a number of years, have no debt and plenty of money in the bank. Since the “fuel tank” seems to be full all the time, they get lax about invoicing and collections. What used to be “Payable upon presentation of Invoice” starts drifting to 15 day receivables, then 30 day, 45 day, until someone finally says stop.
Now the “fuel tank” is running at half full, which is still acceptable to the business owner. But what they don’t realize is that they have inadvertently trained their customers to the bad habit of extended payment terms. And, while this may not have a negative impact on the current business owner, it has in fact devalued their business. Why? Because the next guy is going to have debt service and there won’t be sufficient Cash Flow available to service that debt and pay for normal operating expenses.
This is why businesses need to be critically managed. Part of critical management is Cash Flow Analysis. Knowing where your money is, how much you are going to pay and when you will have to pay it is critical. Mastering Cash Flow will give you a stable business, access to bank credit lines and peace of mind. Mastering Cash Flow is leaving the twenty dollars on the dresser before your spouse needs it.
John S. Stivers, CBI, M&AMI, BVS, BCI, Broker, President of
PBBI-Mr. Stivers founded PBBI in 1991.
Since the company’s inception, Mr. Stivers has had many
awards bestowed upon him. He received The Million Dollar Plus Award
provided by the Business Brokers of Florida in 2003 through 2006. He will
also receive the same award in 2007. Mr. Stivers was also given The
Million Dollar Club Award provided through the Florida Business Brokers
Association in 1995 through 1998 and then again in 2000. In 1998, Mr.
Stivers was awarded The Diamond Achievement Award for Sales of $10
Million or more. Mr. Stivers has earned the designations of Certified
Business Intermediary, Board Certified Intermediary, Business Valuation
Specialist, and is one of only two Merger & Acquisition Master Intermediary
in Brevard County. He is also a current member of the Florida Society of
Accountants and a Licensed Real Estate Broker. He graduated with honors from
Northwestern Military & Naval Academy and served in the United State Air
National Guard. You can contact John Stivers at
Jstivers@pbbi.com or at (888) 287-7763.
