The Business Success Guide | Financial Management Section | Managing Cash Flow | Page 1

Cash Flow Management for Small Businesses

The Cash Flow Statement is derived from the Cash Flow Budget, which is a forecast of cash receipts and
payments. The Cash Flow Budget shows if enough cash is available for expenses, equipment and goods
purchases. Cash Flow also indicates whether external sources of cash are necessary. While many
business owners think profits are the most important financial component of a company, the lack of cash
is often the biggest reason for business failure. In fact, a business may be profitable; yet, it doesn’t have
the cash to pay its expenses. Therefore, effective Cash Flow Forecasting, Planning and Management
are essential to a Company’s success.

Cash Flow Planning is short-term (daily/weekly), as well as, long-term (monthly/quarterly/yearly) so a

business has the optimum amount of cash on hand when required. The Cash Flow Budget controls the
flow of cash into your business to make necessary payments, while not maintaining an excessively high
Cash Balance. It is a function of Management because the efficiency, speed and effectiveness of moving
cash through a business enables the business owner to turn it over into sales and income more quickly,
resulting in greater profitability and minimized interest payments.

The Cash Flow Statement can be a complicated Financial to develop and manage. Therefore, the Cash
Flow Budget is a great place to start and is a very effective tool to manage your business cash flow. The
Cash Flow Budget has three principal sections to manage:

1) Cash to be received

2) Expected Cash Payments

3) When payments are to be made

The monthly Cash Flow Budget is the primary Cash Flow format. We recommend working on three
months at a time and build out the Budget for 12-18 months projected in advance. Each month should
have a Budget and Actual Column, and the Budget should be on a rolling basis (as you complete a
quarter, budget another three months).

The first bottom-line for the Cash Flow Budget is the End of the Month Cash Balance, which is computed
as follows: Beginning Month Cash Balance + Total Cash Receipts – Total Cash Payments. Simply put, a
negative cash balance will require an increase in cash receipts, a decrease in payments or accessing a
short-term loan. The second bottom-line is the End of Month Available Cash, which is calculated by
subtracting the Monthly Contingency Cash Desired and Short-term Loans required. The third bottom-line
is the Cash Required for Capital Investments, which is calculated by taking the End of Month Available
Cash and factoring in Desired Capital Cash and Long-Term Loans Required.

By effectively Planning your Cash Flow Forecast and Managing the various key elements of the Cash
Flow Budget, a business owner can determine the right amount of cash available, when needed. Please
refer to the Appendix at the end of this Article for a Cash Flow Budget Worksheet to assist you in
Forecasting, Planning and Managing your Company’s Cash Flow. Please refer to ABC Business
Consulting’s Business Plan Guide & Workbook for information on developing the Cash Flow Statement
and Company Budgets.

Having constructed your Cash Flow Budget, you can now effectively manage your Cash Flow needs. By
using some numbers from your Income Statement and Balance Sheet, you can analyze your present

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 The Business Success Guide | Financial Management Section | Managing Cash Flow | Page 2

cash situation and apply that to future Cash Flow analysis. It is important to understand the relationships
between your Financial Statements in order to effectively Manage, Plan and Forecast Cash Flows. For
detailed financial analysis and formulas, please see the Financial Section of ABC Business Consulting’s
Comprehensive Business Planning Guide. A couple key formulas will help you predict and manage sales
related Cash Flow issues:

1) The Average number of days to collect money from customers or the Days Sales Outstanding
(DSO):

(Accounts Receivable divided by Annual Sales) x 365

2) The Average number of days to pay your bills or Days Payables Outstanding (DPO):

(Accounts Payable divided by Annual Sales) x 365

So how can the DSO and DPO be applied to your business situation?

1) If your DPO is greater than your DSO, you can carry or float your bills longer than your customers
do and cash will accumulate.

2) If DSO is greater than DPO and your customers are slower in paying their bills, then cash is
departing the business.

3) When DPO is greater than DSO, the bigger the difference, the more cash is flowing into the
business and vice versa.

4) The difference between DPO & DSO, termed the float, is the number of sales days in cash that is
flowing in or out of the business each year. The equation is:

(Sales divided by 365) x Float

a) As an example, a 1.5 m Sales Revenue business with only eight days of negative float
will see $33,000 in cash flow go out the door. This problem can be compounded if the
drop happens during one payment cycle.

So how can you fix negative cash flow? Well, it is really pretty simple. A couple options:

1) Collect receivables more quickly from customers.

2) Obtain better payment terms from suppliers.

Combining options one and two will exponentially increase your cash flows, putting much less strain on
your business operations and allowing you to manage more effectively for Profits. For more information
on Profit Fundamentals, Analysis, Planning and Application, please see our article on Maximizing Profits
in your Business.

Conclusion: In order to effectively manage Cash Flow in your business, you must understand the
relationship between your Cash Flow Statement, Income Statement and Balance Sheet, and what these
financials are telling you. The Cash Flow Budget is the first step in developing your Cash Flow
Statement, utilizing the numbers generated through your Profit Analysis and Income Statement and your
Balance Sheet. The Cash Flow Budget is a great tool to manage and plan your levels of Cash Flow
(please see our example Cash Flow Budget Worksheet following in this Article’s Appendix). Please refer

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 The Business Success Guide | Financial Management Section | Managing Cash Flow | Page 3

to ABC Business Consulting’s Comprehensive Business Planning Guide & Workbook for a
comprehensive list of useful Formulas for effective Financial Analysis.

This article was written the ABC Business Consulting Chief Business Consultant, who has over 20 years
experience helping companies start, grow, turn-around and succeed. Please visit The ABC Business
Consulting Website for more information on what a Business Consultant can do for your Company.

ABC Step by Step Business Success Strategies & Solutions

Business Success

Reference: Entrepreneur Magazine, January 2009, “Keeping Tabs on Cash Flow” by David Worrell.

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The Business Success Guide | Financial Management Section | Managing Cash Flow | Page 4

Appendix: Monthly Cash Flow Budget Worksheet

Note: Monthly Basis; Budget and Actual Columns

Expected Cash Receipts:

1. Cash Sales

2. Accounts Receivable Collections

3. Other Income

4. {Total Cash Receipts}

Expected Cash Payments:

5. Purchase Goods & Equipment

6. Salaries

7. Utilities

8. Depreciation

9. Rent

10. Building Services

11. Insurance

12. Office Expenses

13. Interest

14. Sales Promotion

15. Taxes & Licenses

16. Maintenance

17. Delivery

18. Misc

19. {Total Cash Payments}

Cash Balance:

20. Beginning Month Cash Balance

21. Cash Change (item #4 minus #19)

22. End of Month Cash Balance

23. Desired Contingency Cash Balance

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The Business Success Guide | Financial Management Section | Managing Cash Flow | Page 5

24. Short-Term Loans Required

25. Available Cash- End of Month

Cash for Capital Investments:

26. Available Cash- End of Month (line #25)

27. Desired Capital Cash

28. Long-Term Loans Required

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Copyright 2009 - 2010 | ABC Business Consulting, LLC | www.BusinessConsultingABC.com