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  Working capital and cash flow analysis belong both to planning and operating a Microbusiness. Lack of working capital, due to a poor cash flow, is the major cause of failure in business and, especially, in new business. The reasons for this are numerous and here are the most common:

 -I have poorly defined my customer and my sales are not up to my expectations.

- I know my customer, but my sales are slower than I had anticipated.

- My sales are great, but my collections are slower than expected.

     -My expenses run higher than I expected.

   - I did not get as much money from loans as I needed.

  The end result of all this is that I find myself in a bind, I cannot pay my current expenses and meet my current commitments, as they become due. This situation can lead me to bankruptcy. There is a way for me to avoid this, as part of the planning process I am now engaged in. I will anticipate my needs for working capital by drawing up a cash flow statement, based on my knowledge of my expenses and the realistic collection of my sales. A cash flow, statement is divided into three parts:

         When, how much cash will become available to my business and where will it come from.                                                                                  

         When, how much cash will I have to pay out for expenses and commitments and to whom.

Will I have enough cash left over or will I have to use a line of credit at my bank.

  As a management tool, a cash flow is used to plan and to operate a business. The anticipation of events is used to plan, the actual results and their interpretation (analysis) are used to manage. Of all the management techniques available today, it is the simplest to use and the most neglected in Microbusiness. To succeed, I must understand the management of my cash flow and use it to my business advantage.

  First, a cash flow statement is usually drawn up to cover one yearnof business operations and is subdivided into months, because most expenses recur monthly. Expenses of an occasional nature, quarterly or semi-annual or annual, must be taken into account in the month they become due. The same applies to occasional cash transactions (not regular sales).

  The following examples will tell me how to set up my cash flow statement.

a) Incoming cash - regular

- My cash sales summarized each month.

- My collections on credit sales when I actually expect to collect them. All my sales are not made on the same day of the month, I can expect to collect some next month.

Incoming cash - occasional

- Borrowing from lenders, in the month I get the cash.

- Investment from shareholders or partners, in the month I get the cash.

- Cash from selling assets, other than my products or services, in the month I collect.

- Tax refunds in the month I get the cash.

- Government subsidies or loans in the month I get the cash.

b)    Cash disbursements - regular

- Payment of all monthly expenses, including interest and my personal needs. Cash disbursements

- occasional

- Legal, audit, advertising and income taxes in the month (s) they are due.

- Reimbursement of loans due in the proper month(s).

- Amount(s) due on purchase of building, machinery, equipment and rolling stock, in the proper month(s).

- Cash for investments, when made.

- Other occasional cash disbursements (dividends, letterheads, promotions, etc.)

c)     My cash surplus or my cash needs

- If I end up with a cash surplus, all that I have to do is to closely monitor my operations to make sure this happens.

- If I end up with an extra need for cash, I should immediately contact my banker to negotiate a line of credit, for when I will need it.

I have now completed the forecasting end of my cash flow, I must now prepare my actual cash flow, from daily operations, to compare my performance to the forecast. This will tell me immediately, if events happen according to plan or if I must take action to correct the situation. Here are some tips for cash flow control I will keep in mind at all times.

- Each week, I will update my actual cash flow to find out exactly what is happening and to detect early signs of trouble.

- I will sign all cheques personally.

- I will verify all bank deposits myself.

- I will not sign a cheque, which is not coupled with an appropriate voucher or invoice.

- I  will work closely with my bank on collections, asking for credit checks on new accounts, avoiding poor credit risks (selling C.O.D.) and mentioning any change in my cash situation. This will strengthen my banking relationship and provide me with experienced advice to correct unusual situations.

- If, at first, I cannot negotiate a line of credit with my bank, I will pay a lot of attention to my collections, I will also watch my expenses very closely, spending only what is absolutely necessary to the well- being of my business. Major expenditures will be postponed until I can afford them. At first, this may slow me down but I will learn the helpful lesson of thrift, a long run benefit.

From the above, it is evident that a cash flow is very similar to a source and application of funds. They are different in their uses. A cash flow is a day-to-day management tool, whereas the source and application of funds is a passive statement of the situation, after the fact.

Other uses for the cash flow.

- I can determine, with some precision, when I can afford to make major purchases in equipment, machinery or other capital goods.

- I can also plan, in advance, when to make building improvements, when to buy a new building or warehouse.

- I can also avoid non-essential spending.

- I can manage my bank loans better.

- I will know when to make short term investments, to earn interest, until I need the money.

- By watching the rate of incoming cash, I will know when collections are slowing down and take early action.

- By successfully managing my cash flow, I will substantially reduce my risks as well as avoid unnecessary anxieties.

  In the Worksheet provided at the end of this chapter, I will find the framework to forecast and manage my cash needs. The first worksheet will use information already available in preceding chapters, such as, sales, expenses, purchases of machinery or equipment, planned building improvements, etc.

  Sales will be divided into cash and credit sales. Cash sales will be entered in the month in which they occur and credit sales will be allocated according to expected collections. Expenses will be allocated according to the terms of payment available. Payroll is due when earned, but services may be due only in 30 days. I will make use of all the time I have available. The second worksheet will record actual cash inflows, when my business is operating and I will use my results to compare with my forecast to manage my cash flow. I will set up my cash flow with the information I have and I will ask my accountant for assistance, if I have difficulties I cannot resolve myself. It is important that I understand how to set up my cash flow statement, if I am to use it as my main management tool.