Tag Archives: cash flow assessment

Assess Your Cash Flow Risk

Cash flow risk assessment

Assess your cash flow risk with this simple method here. Your business might not have the factors that make cash flow so different from profits. Maybe managing sales and expenses is enough for your business. It depends on the specific factors here.

1. Product InventoryGive yourself 1 point if you deal with product inventory you have to buy and pay for before you can sell it. Add another point for each month of average inventory
2.Sales on Credit1 point if you have to wait for customers to pay invoices (instead of collecting all in cash, check, or credit card when you make the sale of deliver the service.) Add an additional point for every month beyond one that you wait, on average, for customers to pay.
3. Deposits in advanceIf you added a point for #2 above, subtract 1/2 point for having customers pay significant (35% or more) deposits up front.
4. Other SpendingAdd another point if you have to pay significant principle payments on debts, or purchase significant assets (equipment, vehicles, etc.)
5.Accounts payableSubtract 1/2 point if you pay expenses by collecting invoices from vendors and waiting a month or more before paying.

What the cash flow risk assessment means

If you scored less than one with this cash flow risk assessment, heave a sigh of relief and watch your sales, cost of sales, and expenses very carefully. You don’t have to calculate cash flow as a separate exercise. Develop and manage projections of sales, cost of sales, operating expenses, and other spending including repayment of debt and purchase of assets. Put your sales, costs, expenses, and other spending into a worksheet showing your projections for the next 12 months. And maybe, just to be sure, you continue reading with the next section on cash traps, and the one after that, showing a cash example.

If you assess your cash flow risk as 1 or more on this cash flow risk assement, you might still read the next two sections just to be sure, but face it, you can’t afford not to manage cash flow carefully. Aside from just lean business planning, you need to fully understand and manage cash flow; or have somebody on your team who does. You need the three linked projections covered in Section 5: Profit and Loss, Balance Sheet, and, especially, Projected Cash Flow.