PREPARE A CASH FLOW STATEMENT

A cash flow statement is an important tool to determine the liquidity and overall financial health of your company. And yes, this is different from an income statement and a profit and loss statement as it deals only with cash and cash equivalents. By this very assertion it discounts transactions conducted on credit basis and helps to ascertain working capital needs of the company.


Decode the components
There are primarily three kinds of cash flows—operational, investment and financial. Operational flows result from the core business operations of your company like sale of goods, delivery of services, payment for securing raw materials, etc.

Investment cash flows result from receipts or disbursals related to capital expenditure, asset acquisition and other such activities. For example, the installation of new plant and machinery would lead to an investment cash flow. Financial cash flows, as the term indicates, are related to financial activities such as loans coming in, payment of dividends to shareholders etc.

Understand the direction
Cash can either flow in or out of your company. All the cash coming in is added under a generic head of cash inflows or receipts while the cash flowing out of the company is aggregated under cash outflows or disbursals. Sales lead to inflows while operational expenses lead to outflows. Inflows exceeding outflows always indicate a positive cash flow for the company.

Consider the revenues
The main source of revenues is sales. If you are just starting up, you may want to consider the revenue projections of competitors in your market segment; this could help you to arrive at your own sales figures. There are also books and manuals available to help companies do sales forecasting.

For already operational companies, industry growth projections, market research reports and future prospects for tie-ups could help the projection of sales. Collections from accounts receivable, loans (received) and other cash injunctions (by owners) also contribute to cash inflows.

Crack the expenses
Your expenses will primarily comprise payments made for trade supplies each month viz. raw materials and stock replenishment. In addition to this, there will be fixed operating expenses you incur each month like payroll costs, admin costs, utility payments and finally, maintenance charges. Advertising and publicity expenses also contribute to outflows.

When you start your business, you will get a fair idea of the expenses you are incurring as you go about negotiating rentals, advertising contracts, insurance deals etc. Expenses don’t involve as much of forecasting as sales do. Items like insurance and tax payments also add to the expenses.

Reconcile the statement
Aggregate the cash receipts and payments. For reconciliation, carry forward the balance of the previous month, to this add the total cash receipts and deduct the total cash payments to arrive at the final cash balance in hand. This closing balance will again be carried forward as the opening cash balance for the next month and could either be positive or negative.

Also, you could draw up two side-by-side vertical columns for each month of the year, to tally actual figures vis-à-vis projected ones. This would be a useful tool for you to manage your cash effectively.

©Entrepreneur August 2010