(FREE) Mastering Cash Flow Management
Two perspectives. Operational vs strategic. The "other" financial statement.
Commentary directly from the video (regular type)
My commentary (italics)
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Manage cash flow at two levels
There are two perspectives you need to take when looking at cash flow as a small business owner:
The operational level
Working IN the business
Short-term
The strategic level
Working ON the business
Long-term
Another way to look at it is - the operational level is concerned with things such as:
Keeping the lights on
Making payroll
Accounts payable/accounts receivable.
The strategic level is concerned with things such as:
Pricing
Investments
Employees
Equipment
Borrowing
âIn tinsâ and âout tinsâ
No matter which perspective you are taking, operational or strategic, cash flow management is about balancing the cash you bring in with the cash you send out. Itâs obvious, but worth reiterating - if you send more cash out the door than you bring in then, cash will dwindle. If you bring in more cash than you send out, cash will accumulate.
Operational cash flow management = mapping out WEEKLY âin tinsâ and âout tinsâ for 8-12 weeks.
Strategic cash flow management = mapping out MONTHLY âin tinsâ and âout tinsâ for 12-18 months.
This mapping of cash flow can take place in a spreadsheet or in specialized software.Â
Operational cash flow management will likely involve the use of a rolling weekly cash flow forecast. The only information likely needed is:
The current balance of cash
The expected cash in and outflows for the coming weeks
Here is the free Mastering Cash Flow Management spreadsheet
This is a fairly simple and straightforwardâŚand IMPORTANT task. Make sure you are filling something like this out to ensure that your cash flow stays positive.
Strategic cash flow management would likely involve the use of a rolling monthly forecast that utilized detailed information from your:
Profit and loss (income) statement
Balance sheet
Planned capital expenditures/projects
The end result would be a forecasted cash flow statement.
Operational cash flow management
Forecast out 8 weeks, at a minimum. Best practice is 12 weeks. I would say the most appropriate time period depends on the nature of your industry. Your forecast length should match your cash conversion cycle.
The cash conversion cycle (CCC) is the average amount of time between when you pay for your cost of sales (inventory, direct labor, etc.) and cash is received from your customers.
Whatâs a typical CCC for different sectors?
Manufacturing = 46 days (approx 7 weeks)
Wholesale = 45 days (approx 6 weeks)
Retail = 83 days (approx 12 weeks)
Service = 45 days (approx 6 weeks)
Rolling weekly cash flow forecast
A rolling weekly cash flow forecast is a forecast that is ongoing. Every week your roll it forward.Â
That meansâŚnext week:
Week 2 will become Week 1.
Week 3 will become Week 2.
And so onâŚ
Youâre always looking forward 12 (or however many you choose) weeks.
A new week will be added to the end of the forecast every week. As you can see with the Mastering Cash Flow Management spreadsheet - when you change the start date, all of the subsequent âWeek ofâ dates change accordingly.
Strategic cash flow management
As you might expect, itâs your businessâs overall strategy that influences your strategic cash flow management. Your strategy is your organizationâs master plan Credit.
The cash flow statement reflects the performance of your strategic cash flow management. It is here that youâll see the effects of your growth, and other, strategies. If your strategy doesnât EVENTUALLY reflect positively on your cash flow statements, then it might have been ill-advised.
I frequently say - business, like any other investment, boils down to three fundamental things:
The amount of cash outflows
The amount of time that passes
The amount of cash inflows
The cash flow statement will also tell you how much money you will need to fund the activities required to achieve your business growth objectives. Iâm not quite sure what she means by this. I might comment and ask for clarificationâŚ
The creation of a forecasted (aka Pro Forma) cash flow statement is part of a thorough budgetâŚ
A thorough budget is a byproduct of the strategic planning processâŚ
The first pass of your budget may require that you tweak your strategic planâŚ
Maybe that is what she is referring to(?).
Cash flow statement
The cash flow statement is where you see where your cash came in from and where it went out to. While operational cash flow management and tools like the Mastering Cash Flow Management spreadsheet focus on individual transactions - the cash flow statement focuses on categories like:
Operating activities
Investing activities
Financing activities
The cash flow statement is a CRUCIAL link between your profit & loss statement and your balance sheet. They all tie into each other, so make sure sure you are analyzing all three. My (planned) next post will delve into the cash flow statement in more detail.
Cash is the lifeblood of your business, the cash flow statement tracks all cash inflows and outflows over a period. If the cash flow statement is foreign to you - simply start with the biggest amounts and drill down from there.
For example, if it was cash flow from operating activities that drove a big change in your cash balance - was it a change in accounts payable that drove that? Or, a change in tax liability? Something else? From there⌠what accounts/transactions drove that big change? Your bookkeeper/accountant should be able to provide this information.
Comment below
Do you forecast weekly cash flow? If so, how far out? Whatâs your industry?
Do you analyze your cash flow statement? What do you look at first?