Where did all my money go? Having a cash plan

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Where did all my money go? Having a cash plan

By Anna MaskerIn standard29th January, 2009

The single most important financial step that business owners must take in 2009 is having a cash plan, also known as a cash flow forecast.

Why should you go the extra step and forecast your bank balance?

One word– LIQUIDITY.

Never in recent history has cash been so tight for businesses. Between late-paying customers, banks who are reluctant to lend, and falling equity values in homes on which many business owners relied as their emergency reserve, finding and keeping cash is getting harder to do. Liquidity will be the defining factor in the survival of many businesses this year.

While we’re talking doom and gloom—it doesn’t look like it will be getting better any time soon. Economists claim the downturn could last through the end of next year. Ouch.

Convinced you need a cash flow forecast? Good. Here’s a very simplified version of how to calculate one:

Start with your beginning cash balance for the year

+ Net income forecast

– Bad debt, or late-paying customers

+ Any expenses you put off paying

– Any other cash payments to pay down loans, credit card balances, etc

– Equity draws

= Ending cash balance

While this is a rough estimate of your cash balance, if your break it down by month you’ll be able to see when and if you will run out of cash. Then you can plan on how you will cover the shortfall.

This is the survival mode of cash flow forecasting, but there is an upside too. Say you plan to expand your business in the coming years. Having a cash flow plan will allow you to see if you will have enough money to fund a new employee, buy a piece of equipment or acquire a competitor– without relying on a line of credit or business loan.

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