Cash flow is how much money is coming in to your business, generally sales, and how much is going out, as bills paid. Cash balance is how much money you have in your business checking account. If there is no cash in the company coffers to pay the bills, the payroll, or the taxes, you are broke.

How to use the Cash Flow Calculator

This Cash Flow Calculator will work equally well for a start-up venture or an existing business. There are five key-in fields and seven mouse-drag sliders to enter your numbers. Double click in the key-in fields and type your numbers or click and drag the blue circle right and left on the slider bars.

As you replace the default numbers, watch how the chart changes. If the red bars (the cash balance) fall below zero, you are running out of cash, and have problems. You must change your business assumptions and operations to bring the cash balance back into the positive range.

Starting Cash: Money in your business checking account at the start of this analysis, or on the day you open for business.

First Month’s Sales: Enter how much you think you will sell in the first month.

Cost of Goods Sold (% of Sales): This is the direct cost of purchasing what you sell, such as buying manufactured merchandise, toys as an example, or food if you are a restaurant. If you are a service business and don’t carry any inventory, you can set this to zero.

Monthly Sales Growth: Here you estimate how fast your sales will grow each month, as a percentage.

Sales on Credit: This is the percentage of your customers who wait a month or more to pay your invoice. Most business-to-business sales are made on credit, with the most common terms as Net 30 days. Watch how the chart changes as the percentage of Sales on Credit customers goes up or down. (NOTE: Sales by credit card, check, or cash are all considered cash sales, not Sales on Credit.)

Collection Days: This is the average number of days it takes for your Sales on Credit customers to pay you. Typically businesses invoice with Net-30-day terms, but many companies pay in installments or take two or three months to completely pay an invoice.

Profitability (% of Sales): This is the percentage of sales that you will take in as profit. In this calculator, this percentage is also used to calculate your expenses and taxes.

Initial Inventory Balance: This is the amount of inventory that you purchase before you start selling.

Months of Inventory Kept on Hand: This is the number of months of inventory that you have in stock at all times. Restaurants may have only a week of food inventory on hand, while the toy store may have a two, three or four months supply. The more inventory you buy, the less cash you have for other expenses. Make sure you know what inventory purchases will do to your cash balance.

Starting Receivables: This is the amount of money already owed to you when you start this cash flow analysis – for most start-ups, this will be $0. This money will be calculated based on your Collection Days entry.

Starting Payables: This is the amount of money you already owe to vendors, contractors and suppliers as you start this analysis.

Payment Days: The opposite of Collection Days (above), this one measures how long YOU wait to pay your bills. Naturally, your suppliers want you to pay Net in 30 days or sooner, but your average may be higher.

Variables that affect Cash Flow

There are many variables which can affect your cash balance. The big three are usually accounts receivable, accounts payable, and inventory purchases (stock on-hand).

You have accounts receivable if you sell on credit. This means you deliver a product or service to the customer, send an invoice to the customer and then wait for them to pay you at a later date, preferably somewhere between 30 and 60 days.

You have accounts payable if you buy products or materials or supplies from another business, and then you pay them at a later date. They too prefer that you pay somewhere between 30 and 60 days.

Inventory/Stock on-hand costs a business lots of cash. Suppose you are a toy store. You have to start acquiring merchandise in September and October in order to be well stocked for the holiday buying binge in November and December. You won’t get paid for these toys until they are purchased, but the toy makers want to get paid now. So you pay your bills, and you have merchandise, but less cash on hand to pay your store employees and the electric company.

The Cash Flow analysis helps you forecast how much you will have to pay when, and how much you will take in…and when. If your forecast shows you run out of cash before sales revenue roll in, you have a problem. Knowing this ahead of time gives you the chance to change your financial circumstances. You might get a line of credit from your bank, or get some new investment, or negotiate with your suppliers to delay your payments from 30 to 45 or 60 days.

Run several cash-flow scenarios. Try the best case. Then imagine the worst possible case. You don’t want to be surprised by a zero cash balance. That means you’re bouncing checks.

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Tim BerryTim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Follow him on Twitter @Timberry.