Your Cash Plan

A System to Manage the Lifeblood of Your Business

Every business owner inherently understands the importance of cash to their business. However, according to the SBA Office of Advocacy’s research, the number one cause of business failure is lack of sufficient capital to sustain the operation. When your business runs out of money, it stops. With this in mind, it is imperative to create and adhere to a cash plan to manage this vital component of your business. Essentially, cash planning is budgeting for your cash needs. A cash plan is a cash flow statement for the future, including forecasts of receipts and disbursements expected in upcoming months. Using a cash plan will provide you with the information you need to manage your business’ finances, and can serve as an early warning system should a cash crisis emerge.

The Cash Planning Process

Identify your beginning cash position: How much cash do you have available now, both in the bank and on hand?
Forecast receipts: How much cash do you expect to receive?
Forecast disbursements: How much cash do you expect to spend?
Calculate net cash flow: This is the difference between cash received and cash spent.
Calculate ending cash position: Add net cash flow to beginning cash position. This sets the cash position you expect at the end of the period.

Make sure that you track the following:

Inbound

Sales Receipts
Cash Handling
Credit
Invoicing and Accounts Receivable
Collections

Outbound

Purchasing
Accounts Payable
Inventory Control
Payroll

Forecasts = Projections + Predictions

While you’re not always working with perfectly accurate numbers, the overall accuracy of your cash plan will improve as you develop your cash planning skills and gather more historical data with which to work.

Business Benefits

Regardless of the stage of maturity of your business, cash planning is an essential responsibility from your first day until deep into the future. Cash planning will generate critically important company data, and the cash planning process must be part of your regular financial management routine. Your accountant will be helpful in setting up your cash plan and can help you interpret the data to make sound management decisions.

Benefits you will receive by creating and adhering to a cash plan include

At-a-glance view of your cash position, expected receipts and disbursements.
Historical snapshots of how cash flows through your business
Early detection system for potential cash shortages
Objective data for analyzing opportunities

Cash Plan and Your Financial Management System

Cash plans are vitally important, because they are the reporting tool for your business’ most important asset. Your cash plan can be even more useful when used in conjunction with your two primary financial statements; your income statement and your balance sheet. These statements work together to provide a high-level view of main business activities as well as specific details of the business operation.

Maintaining cash on hand, and meeting the daily business needs are always priorities, but cash should not sit idle. Businesses with cash reserves can create advantages through various means, including joint ventures, acquisitions, research and development, political contributions, traditional savings and smart investments. Large corporations routinely leverage cash using these methods, but savvy, smaller companies can scale-down the same techniques to and use a solid cash position to their advantage.

E-Myth offers an in-depth Money course designed specifically for small business owners. In the Money course you will get detailed information and guidance on managing your businesses finances, as well as worksheets and templates.

Learn more at http://www.e-myth.com