Let’s Understand How Cash
Flow Works!
Presented By Carl Kinker
The Controllership Group
1
Reasons For Business Failure
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In his book Small Business Management, Michael Ames gives the following
reasons for small business failure:
1:Lack of experience
2:Insufficient capital (money)
3:Poor location
4:Poor inventory management
5:Over-investment in fixed assets
6:Poor credit arrangements
7:Personal use of business funds
8:Unexpected growth
Gustav Berle adds two more reasons in The Do It Yourself Business Book:
9:Competition
10:Low sales
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In my opinion 6 out of the first 8 have a direct tie to CASH
A business can be profitable yet experience problems paying bills and meeting
other obligations because it lacks cash at the right time.
2
Cash Flow Basics
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The basic problem is the lag time between incurring an expense and
paying for it, billing a client and actually being paid.
Lenders often look at cash flow projections in connection with a loan
request. They want to see how they will be repaid.
Cash flow is more than your checkbook. This is a start but cash flow is
much more dynamic.
Cash flow is the measurement of everything that either has or will turn
into a cash inflow or outflow.
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How you manage the flow can have a significant impact on your
business success or failure.
3
Cash Flow Basics continued
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Cash flow can presented looking back in time but more importantly you need to
look forward and prepare a cash flow projection or budget to anticipate any
potential problems.
Basic components of cash flow projection:
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Cash Inflow for the month from operations
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Cash Outflow for the month from operations
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Beginning cash on hand
Plus cash receipts anticipated = cash sales, credit sales, A/R collections & other
receipts
Total cash inflow = beginning cash + receipts
Operating expenses such as wages, payroll taxes, rent, utilities, insurance, taxes,
advertising, etc. (cash payments or through accounts payable)
Inventory purchases (cash paid or payments via accounts payable)
Other outflows expected not related to financing or investing
Total up all the outflows
Cash from (used) in operations = Total inflow - total outflow
4
Cash Flow Basics continued
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Basic components of cash flow projection continued:
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Cash provided (+) or used (-) from financing and investing
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(-) Capital expenditures for equipment, fixtures, furniture, autos, land, and
buildings
(-) Principal payments on loans and lines of credit
(+) Borrowing on lines of credit or long term debt
(+) or (-) Owners contributions or withdrawals
Cash provided (used) from financing and investing = total of above items
Net cash inflow (outflow) for the month = cash from (used) in operations +
cash provided or (used) from financing and investing
When preparing your projections try to project out at least one year.
Some of your operating expenses will be fixed like rent and some
variable like hourly wages.
5
Anne’s Lemonade Stand
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Anne sells lemonade for 50 cents a cup. This season she expects to sell 4,280 cups in the 12
weeks she will be open.
Lemons cost 98 cents per pound and one pound of lemons yields 10 cups of lemonade. Sugar
cost $2.20 for a 5 pound bag and each 5 pound bag yields 35 cups. She uses a 22lb bag of ice
per day at a cost of $2.25 per bag. Cups cost 9 cents each.
Start up cost are $75 for pitchers, table, chairs, lemon squeezer, utensils and ice chest.
Labor cost are for her neighbor Joe who works 3 hours each day for $2 an hour except for
Thursday.
How much profit will Anne make and where’s the cash? Remember profitability does not equal
the cash flow.
Seems simple but where do you start and where does Anne get her start up cash? She has $25
from savings to invest where does the rest come from? Is it from Mom (investor or family
member loan), or other credit sources (usually credit cards)?
What about inventory? How much should I have on hand, how long is the lead time to get the
raw materials, how long does the lemonade take to make, quality control (should I start with
fresh lemonade each day), etc.?
Then there is the question about location.
6
Anne’s Lemonade Stand
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Let’s Start with calculating some basic information
What is Anne’s Standard cost?
5 lb of sugar yields
35
Material cost
Lemons per lb
$0.98
Sugar 5lb bag
$2.20
Total standard material cost
1
0.098
0.06286
0.16086 per cup
Bag of ice
$2.25 cost per day
Labor cost/hr
# hrs worked
Cost per day
$2.00
3
$6.00
7
Anne’s Lemonade Stand
Next step let’s project revenue and expenses

Anne's Lemonade Stand
Period 1
Period 2
Period 3
Period 4
Period 5
Period 6
Period 7
Period 8
Period 9
Period 10
Period 11
Period 12
Total
5%
6%
8%
10%
8%
8%
10%
10%
15%
8%
8%
5%
100%
214
257
342
428
321
321
428
428
642
342
342
215
4280
107.00
128.50
171.00
214.00
160.50
160.50
214.00
214.00
321.00
171.00
171.00
107.50
2,140.00
34.42
41.34
55.01
68.85
51.64
51.64
68.85
68.85
103.27
55.01
55.01
34.58
688.47
72.58
87.16
115.99
145.15
108.86
108.86
145.15
145.15
217.73
115.99
115.99
72.92
1,451.53
5
5
5
5
5
5
5
5
5
5
5
5
60
$6.00 Salary & Wages
24.00
24.00
24.00
24.00
24.00
24.00
24.00
24.00
24.00
24.00
24.00
24.00
288.00
$2.25 Ice
11.25
11.25
11.25
11.25
11.25
11.25
11.25
11.25
11.25
11.25
11.25
11.25
135.00
$0.09 Cups
19.26
23.13
30.78
38.52
28.89
28.89
38.52
38.52
57.78
30.78
30.78
19.35
385.20
$1.00 Wagon rental
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
60.00
1.00% Interest
0.00
1.00
0.80
0.60
0.40
0.20
0.00
0.00
0.00
0.00
0.00
0.00
3.00
Total operating ex penses
59.51
64.38
71.83
79.37
69.54
69.34
78.77
78.77
98.03
71.03
71.03
59.60
871.20
Net Profit
13.07
22.78
44.16
65.78
39.32
39.52
66.38
66.38
119.70
44.96
44.96
13.32
580.33
Cups Sold
$0.50 Sales
$0.16086 Cost of sales
Gross Margin
Assumption # day s open
Operating Ex penses
Other
0.00
8
Anne’s Lemonade Stand
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Clearly Anne made a profits with a 67.83% gross margin and low overhead but
how does the cash flow look over this same time period?
Many question need to be asked to project her cash flow.
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What inventory levels should she maintain – minimum and maximum?
How much lemonade should be made each day (production)?
Could profitability be enhanced by ordering bulk quantities of raw material and how
would this impact liquidity?
Will she have enough staff to cover peak sales periods?
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What other problems should she anticipate?
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Bad weather, bad lemons, have secondary suppliers, transportation, bad location
What assets will need to be bought that effect the balance sheet and cash but not
revenue and expense?
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Illness, vacations, no shows, unexpected sales volume
Pitchers, mixing containers, cash box, cost to construct the stand, delivery vehicle
Are there other cost overlooked by Anne?
9
Anne’s Cash Flow Projection
Inventory cost of purchases
Purchase-lemons-lbs
46.16
33.52
41.94
31.46
31.46
41.94
41.94
62.92
33.52
33.52
21.07
419.44
Purchase Sugar-5 lb bags
33.00
22.00
26.40
19.80
19.80
26.40
26.40
39.60
22.00
22.00
13.20
270.60
838.88
541.20
Total purchases
79.16
55.52
68.34
51.26
51.26
68.34
68.34
102.52
55.52
55.52
34.27
690.04
1,380.08
Lemons
47.10
34.20
42.80
32.10
32.10
42.80
42.80
64.20
34.20
34.20
21.50
Sugar
13.46
9.77
12.23
9.17
9.17
12.23
12.23
18.34
9.77
9.77
6.14
Cups of lemonade made
471
342
428
321
321
428
428
642
342
342
215
0
4,280.00
Beginning inventory $
0.00
44.74
58.91
72.25
54.66
54.27
70.98
70.47
104.14
56.38
56.89
36.15
0
Lemons
46.16
33.52
41.94
31.46
31.46
41.94
41.94
62.92
33.52
33.52
21.07
Sugar
33.00
22.00
26.40
19.80
19.80
26.40
26.40
39.60
22.00
22.00
13.20
Inv entory purchased
79.16
55.52
68.34
51.26
51.26
68.34
68.34
102.52
55.52
55.52
34.27
0.00
690.04
Inv entory sold
34.42
41.34
55.01
68.85
51.64
51.64
68.85
68.85
103.27
55.01
55.01
34.58
688.47
Ending inventory $
44.74
58.91
72.25
54.66
54.27
70.98
70.47
104.14
56.38
56.89
36.15
1.57
1.57
44.74
14.18
13.33
(17.59)
(0.38)
16.70
(0.51)
33.67
(47.75)
0.51
(20.74)
(34.58)
1.57
Production-cups
428.00
122.29
Purchases
419.44
270.60
10
Anne’s Inventory Assumptions
Production and inventory calculations Raw Materials Inventory units
Lemons-Beginning
Period 1
Period 2
Period 3
Period 4
Period 5
Period 6
Period 7
Period 8
Period 9
Period 10
Period 11
Period 12
Total
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Purchase
47.10
34.20
42.80
32.10
32.10
42.80
42.80
64.20
34.20
34.20
21.50
419.44
847.44
Used in production
47.10
34.20
42.80
32.10
32.10
42.80
42.80
64.20
34.20
34.20
21.50
0.00
428.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
419.44
419.44
Lemons-Ending
Sugar-Beginning
0.00
1.54
1.77
1.54
1.37
1.20
0.97
0.74
0.40
0.63
0.86
0.71
0.00
Purchase
15.00
10.00
12.00
9.00
9.00
12.00
12.00
18.00
10.00
10.00
6.00
270.60
393.60
Used in production
13.46
9.77
12.23
9.17
9.17
12.23
12.23
18.34
9.77
9.77
6.14
0.00
122.29
1.54
1.77
1.54
1.37
1.20
0.97
0.74
0.40
0.63
0.86
0.71
271.31
271.31
0.00
471.00
813.00
1,241.00
1,562.00
1,883.00
2,311.00
2,739.00
3,381.00
3,723.00
4,065.00
4,280.00
0.00
471.00
342.00
428.00
321.00
321.00
428.00
428.00
642.00
342.00
342.00
215.00
0.00
4,280.00
Sugar-Ending
Finished Goods (Lemonade)
Beginning Inventory
Plus Production
Less Cost of sales
Ending Inventory
Inventory usage required for sales
Lemons-Lbs
Sugar - 5 lb bags
Sugar rounding
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
471.00
813.00
1,241.00
1,562.00
1,883.00
2,311.00
2,739.00
3,381.00
3,723.00
4,065.00
4,280.00
4,280.00
4,280.00
214
257
342
428
321
321
428
428
642
342
342
215
4,280.00
21.40
25.70
34.20
42.80
32.10
32.10
42.80
42.80
64.20
34.20
34.20
21.50
428.00
6.11
7.34
9.77
12.23
9.17
9.17
12.23
12.23
18.34
9.77
9.77
6.14
122.29
7
8
10
12
9
9
12
12
18
10
10
6
123.00
Purchase-lemons-lbs
46.16
33.52
41.94
31.46
31.46
41.94
41.94
62.92
33.52
33.52
21.07
419.44
838.88
Purchase Sugar-5 lb bags
33.00
22.00
26.40
19.80
19.80
26.40
26.40
39.60
22.00
22.00
13.20
270.60
541.20
Total purchases
79.16
55.52
68.34
51.26
51.26
68.34
68.34
102.52
55.52
55.52
34.27
690.04
1,380.08
Inventory cost of purchases
Production-cups
Lemons
47.10
34.20
42.80
32.10
32.10
42.80
42.80
64.20
34.20
34.20
21.50
Sugar
13.46
9.77
12.23
9.17
9.17
12.23
12.23
18.34
9.77
9.77
6.14
Cups of lemonade made
Beginning inventory $
471
342
428
321
321
428
428
642
342
342
215
428.00
122.29
0
36.15
4,280.00
0.00
44.74
58.91
72.25
54.66
54.27
70.98
70.47
104.14
56.38
56.89
0
Lemons
46.16
33.52
41.94
31.46
31.46
41.94
41.94
62.92
33.52
33.52
21.07
Sugar
33.00
22.00
26.40
19.80
19.80
26.40
26.40
39.60
22.00
22.00
13.20
Inventory purchased
79.16
55.52
68.34
51.26
51.26
68.34
68.34
102.52
55.52
55.52
34.27
0.00
690.04
Inventory sold
34.42
41.34
55.01
68.85
51.64
51.64
68.85
68.85
103.27
55.01
55.01
34.58
688.47
Ending inventory $
44.74
58.91
72.25
54.66
54.27
70.98
70.47
104.14
56.38
56.89
36.15
1.57
1.57
44.74
14.18
13.33
(17.59)
(0.38)
16.70
(0.51)
33.67
(47.75)
0.51
(20.74)
(34.58)
1.57
Purchases
419.44
270.60
11
Ways To Improve Cash Flow
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Timely customer invoicing must be a high priority
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If you use billings try to understand your customer’s payment
patterns
Weekly follow-up on collecting receivables and monitoring your
customer accounts
Make sales for cash or credit card rather than invoicing
Maintain reasonable inventory levels – reevaluate what is
reasonable often
Renegotiate payment terms with your suppliers to extend
payment terms
If your competition is getting deposits or money up front are
you?
Pay invoices or bills when they are due not as they come in
12
Ways To Improve Cash Flow
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Finance fixed asset purchases
Apply for a working capital line of credit
Be realistic in amounts you are taking out personally
Consider increasing your pricing
Find ways to reduce expenses
Increase sales
13
Proper Use of Debt Versus
Improper Use of Debt
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Matching type of debt with its use
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Short term money (line of credit and
charge cards) should be matched to
working capital needs short term in nature
Term loans should be matched to buying a
business, equipment and permanent
working capital. Long term in nature.
14
Why This Is Important!
15
What Does All This Mean?
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Cash flow is the life blood of your
business. Just like our bodies cannot
allow a loss of blood on an ongoing
basis neither can your business.
You have to understand your cash flow
or work with someone that can help
you to understand it and make it work
for you!
16