FINANCE: WORKING CAPITAL AND CASH FLOW
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
-I have poorly defined my
customer and my sales are not up to
- I know my customer, but my
sales are slower than I had
- My sales are great, but my
collections are slower than
-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
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
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).
examples will tell me how to set up my cash flow statement.
cash - regular
- My cash
sales summarized each month.
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.
from lenders, in the month I get the cash.
from shareholders or partners, in the month I get the cash.
- Cash from
selling assets, other than my products or services, in the month
- Tax refunds in the month I get the cash.
- Government subsidies or loans in the month I get the cash.
disbursements - regular
Payment of all monthly expenses, including interest and my
- Legal, audit,
advertising and income taxes in the month (s)
- Reimbursement of loans due in the proper month(s).
- Amount(s) due on purchase
of building, machinery, equipment
stock, in the proper month(s).
- Cash for investments, when made.
- Other occasional cash
disbursements (dividends, letterheads, promotions, etc.)
surplus or my cash needs
- If I end up with a
cash surplus, all that I have to do is to
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
I will sign all cheques personally.
- I will verify all bank
- 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
- 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
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
- 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
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
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