I worry most about cash flow because it’s so insidious. Like the old saying about rivers, still waters run deep. Cash is frequently hardest to manage when businesses are growing. It is the least intuitive of the financial projections, but the most important. I hope you’ve read through the cash flow traps portion of Chapter 4. I was trying to scare you. It’s good for you.
We got through the basic business numbers with that discussion of cash traps instead of the full detail of the cash flow. That might be enough for the early plan, but eventually you’re going to want to build a real cash plan, using real numbers, and real financial math.
Experts can be annoying. There are several ways to do a cash flow plan. Sometimes it seems like as soon as you use one method, somebody who is supposed to know tells you you’ve done it wrong. Often that means she doesn’t know enough to realize that there is more than one way to do it.
Let’s start simple here, with a basic direct cash flow plan.
| A Simple Basic Cash Flow Plan |
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| There’s nothing particularly fancy about this plan, or the table, or the math. You just need to keep track of money coming in, and money going out. This means paying bills as they come due (i.e., paying accounts payable), and paying off loans. |
Even at this basic level, you can see the potential complications and the need for linking up the numbers using a computer. Your estimated receipts from accounts receivable must have a logical relationship to sales and the balance of accounts receivable. Likewise, your payments of accounts payable have to relate to the balances of payables and the costs and expenses that created the payables. Vital as this is to business survival, it is not nearly as intuitive as the sales forecast, personnel plan, or income statement. The mathematics and the financial projections are more complex.
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
