Jack Parker is the Business Analyst at the Alexandria SBDC and can assist Alexandria small businesses with all of their financial issues, including cash flow analysis. In this blog post, he discusses the importance of knowing your cash flow.

As a business owner, I am sure that you have heard the term Cash Flow and that all owners should be aware of where their cash is going.  Some ask, “Where did it go?”. Others have found out, are taking corrective measures and are now planning for the future by projecting their position over the next 12 months.

This process is not as difficult as it may initially seem and all banks want to see these projections and learn how your business works to judge loan repayment ability from operations. Projections should be presented monthly on Excel spreadsheets with line items supported by separate written assumptions. These assumptions are composed using your best business thinking and judgment of what will happen within and to your business over the period. Without these assumptions, your banker will be unable to understand the performance data. And later, you may not be able to remember how certain numbers were derived leaving you in a poor position to re-forecast or prepare projections for the following year.

There are two forms of projections that should be addressed to show a different financial picture for the same period:

The Income Statement (P&L): Shows performance over a stated period of time (Monthly, Quarterly, Annually)

The Cash Flow Statement: Shows the movement of cash from one period to another and specific cash position at the end of any one period (Month, Quarter, Year End)

The structure for creating the Income Statement version is based on accepted accounting principles and IRS rules. There is only one rule for the Cash Flow Statement – “Into the checking account & out of the checking account”. Each of these statements has a purpose and can help you plan for the future growth of your business. Financial modeling tasks such as these can assist with hiring plans, expansion into new product lines or opening a new store or office location.

Always remember, the SBDC is here to help you with any business matter – and we invite you to explore our website, which contains a wealth of information for business owners and entrepreneurs.