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In the second of our four part series on cash flow, we look at what you can do to plan your business' cash flow needs.

Cash flow is the balance between your income and your expenditure. When these get out of balance or your timing is wrong, your business is drained of its essential lifeblood.

Planning your cash flow is essential. It enables you to plot out the expected cash needed to operate and grow your business, warns you of any periods of cash flow difficulty and ensures that you don't put your business at risk.

The key is to:

• Identify where the money comes from in your business; and
• When you can expect it to arrive.

Once you have done this, write down all of the months of the year and start to plot out how much money will arrive in each month and where it will come from. To do this you need to:

1. Identify any money you are planning to invest in your business over the coming year
2. Know if you are planning to borrow any money
3. Estimate your sales for the coming year
4. Work out how long it will take for your customers to pay you
5. Identify any other money that is likely to come in to the business and when

The cash coming in to your business might look like this.

Cash flow projection

Source	January	February	March	April	May	June
Capital introduced	$50,000
Cash sales	$4,000	$5,000	$10,000	$15,000	$14,000	$9,000
Debtors collections		$42,000	$65,000	$56,000	$62,000	$70,000
Funds borrowed			$50,000
Total funds received	$54,000	$47,000	$125,000	$71,000	$76,000	$79,000

The impact of time

Cash flow is all about timing – when the money comes in and when it needs to go out.

A lot of people get profit and cash flow confused. And that's why you may have asked your accountant or yourself that question, "If I'm making all this profit where is it?"

One part of the answer is the timing impact that occurs in most businesses between when the profits are made and when the cash is required to meet day-to-day operating.
Let's have a quick look at some of the areas of your business where there are timing impacts:

1. You decide to supply some of your customers on credit and so you open a number of credit accounts. The sales you make this month are not paid for until the end of the following month. Immediately, you have created a 30-60 day timing difference between your sales (creating the profit) and the receipt of the payment (your cash flow).
2. Your sales have some seasonal fluctuations such as Christmas time. In order to have your stock on the shelves when you need it you need to purchase it two months before the start of the sale period. Your suppliers give you 30 day credit terms. Even allowing for this, you probably have your money tied up in the stock about 45 days after you have paid your suppliers. And if for any reason you don't sell all of the purchased stock then you will be funding it for a longer time period. Your rent on your premises is paid monthly and in advance. So even before you have made any sales and earned any profit you need to outlay some of your monthly operating costs.
3. By understanding that the timing of your cash flow could be quite different to your business trading you will recognise the need to plan for the movements in your cash flow.

This is why you need working capital. It provides you with a cash buffer when you need it.

A typical guide to cash payments going out of your business could look like this.

Cash payment	January	February	March	April	May
Suppliers	$2,000	$43,500	$37,500	$35,100	$38,000
Leases	$1,860	$1,860	$1,860	$1,860	$1,860
Wages	$6,000	$8,000	$9,000	$9,000	$9,000
Rent	$4,000	$4,000	$4,000	$4,000	$4,000
Advertising			$700
Accounting fees		$400
Capital expenditure	$2,000			$500
Tax payments				$2,000
Total Payments	$15,850	$57,760	$53,060	$52,460	$52,860

• Series 1: Where does all of my cash go?
  
  
• Series 3: Show me the money!
  
  
• Series 4: Bringing in the money – faster!