Do you have a cash flow plan?

May 29, 2013 by Ola Emmanuel

   

Ola Emmanuel
| credits: File copy

As water is to the fish and as air is to life, so is cash to business. No living thing can survive without the air; likewise, a business deprived of cash will die prematurely. Cash is liquid, it also flows like water. It has a way of finding its level or channeling its flow toward the direction it’s desperately needed. If an individual’s or a business’ purse has been made to become like a hill or mountain through poor decisions, bad spending habits or other circumstances, cash will natural flow towards the ‘valley’ – a welcoming pocket. It is also sure that the direction it flows can either bring prosperity and blessing or ruin, chaos, disappointment, and gnashing of teeth.

A business cannot exist without cash flow; but a thriving business needs good flow of cash in both directions – into and out of the business. However for a business owner to be happy, the volume of flow into the business should be higher than the volume flowing out. Let me explain it in another way: like a house, it is ability to keep the cash’s entrance door wide open but the exit door carefully and consciously controlled that makes a business operator a very happy person.

When a business is started, it is normal if expenses are higher than amounts generated from sales. If a business runs out of cash during this period, such a business may die before it reaches the period where it can sustain itself. The challenge before every business manager is how to adequately sustain the flow of cash in both directions during the period that the business is prone to failure, and to carefully plan and monitor the flow at other times in the life of the business.

In doing a financial plan for a business, it is necessary that the issue of cash flow be considered carefully. During the period that sales may be low, how will a business meets its payment obligations? How do you keep the employees in good shape? True to who they are, when some employees sense that the business they work for is not liquid financially, they are less bothered about what contribution they can offer to make the business thrive.

Rather, their minds are occupied with how to move out and secure another job; and the resources of the struggling business may be used to search for and secure other employment. For an entrepreneur not to find him or herself in this situation, he or she needs careful cash flow plan. Also, a business that is transacted on credit will need at least double the amount needed for stocks and materials for its operations not to stop while awaiting payment for products sold. And if a particular equipment will be required for the business and it has to be by cash payment, the business may have its operations hindered.

A cash flow plan is a forecast that shows how much money is expected to come into a business and how much is expected to flow out of the business in a particular period, usually a month. It is a table that reveals well ahead of time when a particular amount of money is expected to come into the business and when a particular payment is to be made.

In doing a cash flow plan, it relies heavily on its twin sister, the sales and costs plan (discussed last week on this page), and it requires about twelve steps – depending on the knowledge of the person doing it.

The cash flow plan for your business should show in figures the amount of money likely to be in your bank account or cash box at the end of each month of a period the plan covers. It should show where money is coming from (whether from sales of products, liquidation of investments, gifts, loan, or wherever) and the exact amount that is expected. Likewise, your cash flow plan should vividly reveal what items you may need to spend money on in your business and how much you need to spend.

If you have known ahead of time how much money that may lie idle in your bank account in a particular month, you will be able to have ample time to plan very well to judiciously engage the money, and if you will need a particular amount of money in a particular month you will be able to have ample time to think about where the money will come from and what you need to do to secure it. This is part of business riddle a good cash flow plan helps you solve.