Finance: Project your cash flow

Q. Q. Is there a connection between making a profit and having cash?
Thursday, May 24, 2012

A. For a business to have a comfortable amount of cash on hand, the business cannot be experiencing a tremendous growth or a comparable downturn in business. When there is a lack of sales, the business will have a tendency to require you to sell off inventory to pay the operating expenses. Of course, if you need all of that inventory to produce what sales you have, then you find yourself with a lack of cash.

At the opposite end of the spectrum is the business that is experiencing a sizable increase in sales. You have increased operating expenses such as payroll and other variable expenses necessary to produce the sales. Then, you have to have the inventory on hand to deliver to customers. That requires ordering additional inventory and incurring the cost of additional inventory. Collections from those increased sales are also lagging behind, so your business becomes a “bank” to finance those purchases by your increase in customers.

The projectionary cash-flow plan allows you to take your budget and add the necessary information so that you will know if you will have enough cash to pay the bills for each of the next 12 months. 

Starting with the cash on hand at the beginning of the month, you add the anticipated profit. Take into consideration the change in your payables and receivables. To this, add the cost of goods sold and subtract the inventory you paid for.

The resulting number gives you the anticipated cash on hand for the end of the month. String together 12 months and you will know if you will have the necessary cash to take your business where you want to go for each of the next 12 months.

Tom Shay is principal of Profits Plus Solutions. Reach him at or 727-464-2182.