“The fact is that one of the earliest lessons I learned in business was that balance sheets and income statements are fiction, cash flow is reality.”
– Chris Chocola
A good cash flow analysis might be the most important single piece of a business plan. All the strategy, tactics, and ongoing business activities mean nothing if there isn’t enough money to pay the bills. And that’s what a cash flow projection is about – predicting your money needs in advance.
The Projected Cash Flow is what links the other two of the three essential projections, the Projected Profit and Loss and Projected Balance Sheet, together. The cash flow completes the system. It reconciles the Profit and Loss with the Balance.
Happily, LivePlan does your cash flow automatically, using your inputs from the sales forecast, spending budget, cash assumptions, loans and investment, and starting balances. You already did that with LivePlan in Chapter 7, LivePlan Budgets Your Cash Flow.
Cash Flow is About Management
Reminder: you should be able to project cash flow using competent educated guesses based on an understanding of the flow in your business of sales, sales on credit, receivables, inventory, and payables. These are useful projections. But real management is minding the projections every month with plan vs. actual analysis so you can catch changes in time to manage them. The illustration here shows projected cash balance for the bicycle store compared to the projected cash flow, using the projections presented in this chapter.
I worry most about cash flow because it’s so insidious. Like the old saying about rivers, “still waters run deep.” Cash is frequently hardest to manage when businesses are growing. It is the least intuitive of the financial projections, but the most important.
I hope you’ve read through the This Takes Constant Attention in the earlier discussion in Chapter 7. It’s good for you. Planning the cash flow is vital. Having a negative cash flow every so often, for a month, isn’t a big problem. You should never have a negative cash balance. That’s the same as bouncing checks.