Use the Cash Flow Chart as a Cash Pilot

Chapter 16: Cash is King - Page 16.16

Use the Cash Flow Chart as a Cash Pilot

Every plan should have a monthly cash flow chart, which the computer draws from your cash flow table. The chart takes the data from the financial worksheet in the rows for net cash flow and cash balance. Use this chart as an illustration of your cash flow projection.

As an example of how useful the cash chart can be, revisit the series of cash scenarios presented in Financial Analysis: About Business Numbers.

You can see how the estimated cash varies radically depending on critical assumptions for collections, payments, and inventory; and also how the cash chart shows you those variations instantly. When I am actually working with a business plan, I usually keep the cash chart visible as I change my assumptions. That way I know immediately when I need to revise numbers further because my cash balance is negative.

Summary

Your cash plan is the most critical element of your business projections. If it is going to be useful at all, a business plan helps you develop a realistic cash estimate, based on the underlying relationships we explored in the previous chapter. Whenever you change an assumption in sales forecast, personnel plan, profit and loss, or balance sheet, it affects your cash flow.

The examples in this and the previous chapters pointed the way toward cash flow, and the way cash works. Profits are very important to cash, of course, and they work in obvious ways — the more profits, the better the cash, because profits are sales (that generate cash) minus costs and expenses (that cost cash). What is less obvious, however, is the impact of balance sheet items:

An increase in assets decreases your cash. A decrease in assets increases cash.
An increase in liabilities increases cash. A decrease in liabilities decreases cash.

These two principles lead eventually to the impact of receivables, inventory, and payables. As you look at your assumptions for the cash flow, keep in mind that every extra dollar of receivables or inventory as assets is a dollar that you don't have in your cash balance. Every dollar in payables is a dollar that you have in cash, too. Although this simple cash model doesn't show the critical impact as clearly as our examples in the previous chapter, the mathematics and financial principles are the same.

Your business plan should help you develop a realistic cash estimate with mathematically and financially correct cash tables, in which all the key tables are linked to the cash flow correctly.

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