Understanding Cash Flow Presented by Joanne L. Edgar, CPA

Understanding Cash Flow Your profit will never equal your cash. Your goal as a business owner is to make profits. To do this you need cash.

Mistakes Spending profits before they exist. Expanding in anticipation of sales that either don’t materialize or are delayed. Under capitalizing start up or expansion. Carrying too much or the wrong kind of debt. Failure to plan.

Sources and Uses of Cash Analyze your cash in and cash out. Where is your cash derived? Where does it go? What are your terms, your margins, return on investment, float time?

Sources and Uses of Cash Sources of cash – cash sales, collection of receivables, loan proceeds, investment earnings, sale of assets.

Sources and Uses of Cash Uses of cash – expenses (payment of payables), purchase of assets, loan payments, dividends and distributions.

Review financial reports Balance Sheet – this is a snapshot in time of your assets, liabilities and net worth. The change in the balance sheet from one point in time to the next is your cash flow.

Review financial reports Profit and Loss – This report shows your profit or loss for a period of time (one month, one quarter, one year). Revenue less expenses.

Review financial reports Cash Flow – This statements shows your sources and uses of cash for a period of time.

Review financial reports Accounts Receivable Aging – This report shows you what customers owe you money and how old the invoice is. Accounts Payable Aging – This report shows you what bills you owe and how old they are.

Review financial reports Sales by Customer and/or Item – Gives you sales totals by customer or item for a period of time. Some programs offer graphs that can show you in a snapshot your largest customers or best selling items.

Sources of Cash When you sell something you either receive cash, check, or credit card. Other sources of cash come from loans, earnings on invested assets or sale of assets. Maximize the cash in and minimize the time it takes to get it.

Sources of Cash Are you prices set at the optimal rate for profit and market share? What are your terms with your customers? Can these be improved? What form of payments do you accept? Will changing payment methods help you?

Uses of Cash When you pay something, expenses for operations, purchase of assets or paying back loans, generally this is done with a check but sometimes with cash or credit card. Minimize the cash out and maximize the time it takes.

Uses of Cash Can you reduce your expenses? What are your terms with vendors? Can your terms be improved? What form of payment are you using? Will changing the payment method help you?

Banking Banks offer a host of products that can help both in managing cash flow and maximizing your return.

Banking Credit card processing – Banks are not usually the cheapest of processing sources but they offer the service and tie it to your accounts with potentially shorter processing time. There are only a few companies that actually process the credit card payments but several thousand resellers of the service. Shop around.

Banking ACH (Automated Clearing House) – This is essentially an electronic wire of funds from one bank account to another. There is a fee per transaction. This process can be used as a way to get your customers funds in your account faster or could save you the cost of processing checks.

Banking Electronic Check Depositing – This is where you scan the checks from your customers and the deposit is made from the scan rather than making a trip to the bank.

ZBA (Zero Balance Accounts) – This is where funds from your operating account would be transferred only as checks or disbursements are presented to the ZBA account. This can offer you greater use of float and help in the prevention of fraud. Banking

Credit and Debit cards – Can give you a credit line, help with summarizing expenses, ease in paying while on the road, and reduce the need for expense reports.

Banking On line banking and bill pay – These services are a time saver and can save you the cost of checks and stamps.

Forecasting and Monitoring This is where it can get complicated! Rule of thumb is to keep it as simple as you possibly can. Think about hiring resources to help you. This is valuable information that can make or break your success.

Forecasting and Monitoring Monitoring – how often depends on the complexity of your company. I suggest setting up a dashboard (snapshot) of your key figures. This can be done easily with most accounting software packages however they may not have what you are looking for in the template. If that is the case a manual system works but may be too time consuming for the benefit.

Forecasting and Monitoring Review financial statements monthly. Review checking account balance and activity daily Review collections Review expenses

Forecasting and Monitoring Forecasting – Create a simple spreadsheet to calculate your total cash in and total cash out for each month for one year. Compare your forecast to your actual for the current month and update the remaining 11 months for any changes. This is known as a rolling forecast. Your current 3 months will be the most accurate with the last 3 months as basic garbage.

Forecasting and Monitoring The purpose is to know what is coming and to plan for it. This tool will help you figure out and plan your cash flow. Can you afford to purchase equipment, can you hire someone, do you need to borrow money or can you repay money.

Contact Information Joanne L. Edgar, CPA J. Edgar Group PLLC, CFO Consulting Services 1361 Elm Street Suite 308, Manchester NH Office Direct Cell Please mention the class when you call/