Cash Flow from Operations

"Why is there so much month left at the end of the money?" -- Unknown

The cash flow from your business's operations -- the cycle of cash flow, from the purchase of inventory through the collection of accounts receivable -- is the most important factor for obtaining short-term debt financing. A lender's primary concern is whether your daily operations will generate enough cash to repay the loan. In addition, cash flow shows how your major cash expenditures relate to your major cash sources. This information may give a lender insight into your business's market demand, management competence, business cycles, and any significant changes in the business over time.

Included among the Business Tools is a cash flow budget worksheet. The worksheet is an Excel template that can be used in Excel 4.0 or higher. Because it's a template, you can use the worksheet over and over again and still retain an original copy of it. The worksheet is set up to be used for projecting your cash flow for six months. We've formatted the worksheet and put in most of the cash inflow and outflow categories for you. All you have to do is put in your numbers and print it.

While a variety of factors may affect cash flow and a particular lender's evaluation of your business's cash flow numbers, a small community bank might consider an acceptable working cash flow ratio -- the amount of available cash at any one time in relationship to debt payments -- to be at least 1.15:1.

As most lenders are aware, cash flow also presents the most troubling problem for small businesses, and they will typically require both historic and projected cash flow statements. In preparing cash flow projections for newer businesses, you may want to refer to any one of several sources that publish sales/expense ratios for specific industries. The ratios will help you compute realistic sales revenues and the proportion of expenses typically necessary, in that industry, to generate the projected sales revenue.

Warning A business's cash flow will usually include not only the money that goes in and out of the business from its operations (sales less expenses), but also any cash flow from investments or financial activities (e.g., payments and receipts of interest and dividends, long-term contracts, insurance, sales or purchase of machinery and other capital changes, leases, etc.) However, the most important component to a lender is simply whether the business's ongoing sales and collections represent a sufficient and regular source of cash for repayment on a loan.

Because of the attention that cash flow receives, you may want to consider our suggestions for improving your positive cash flow.