Cash Flow Control
Just as jet fuel keeps a plane aloft, cash fuels business. A pilot is very careful to accurately predict the fuel requirements. You should place the same importance on cash flow control because if at any point in the future, you run out of fuel, like the pilot, you've got a BIG problem.
Cash flow control is a simple method of projecting your future needs for cash. It is an income statement covering future periods of time that has been changed to show only cash: cash coming in and cash going out and what your balance of cash is at the end of designated periods of time. This is a great tool because you can predict your future needs for cash before the needs arise.
In cash flow control, for each of a number of intervals of time, you make conservative estimates for your future sources of cash (IN) and future expenditures (OUT). Use low, conservative figures for IN items and use high estimates for OUT items. For the initial period, say a month, you start with the cash you now have. To this, you add IN items and subtract the OUT items, which results in the cash at the end of the month. The cash at the end of the month becomes the starting cash for the next month.
The attached cash flow control spreadsheet shows that ending cash for this first period becomes the starting cash for the second period. The ending cash for the second period becomes the starting cash for the third period, and so on. Your projection should be made for an upcoming 12-month period. The projection will be a useful tool for you to arrange financing before it is required by showing your banker that you are sophisticated enough to provide for future cash in order to preserve liquidity.
You can use this simple cash flow format to make up your own cash flow projection for the business you have in mind. It is so simple, yet can be so valuable!
Accounting and Cash Flow Punch List
  • Prepare frequent financial statements, at least, monthly or even weekly.
  • Keep track of key income statement percentages. If you're in manufacturing, your cost of goods sold percentage should be relatively the same as competitors in your industry.
  • Compare your income statement with prior periods.
  • To start with, you won't need certified financial statements. Accountants have three levels of statements: certified, reviewed and compiled. For most startups, the compiled type will work; that is, your accountant prepares the financial statement with a letter stating that the numbers are based on the information you have provided.
  • From the beginning, maintain good internal controls. Learn from the practices used in your industry to prevent dishonesty and shrinkage. Shrinkage includes shoplifting and other types of stealing, which results in the "shrinkage" of your inventory.
  • Do not delegate the authority to sign checks or purchase orders.
  • Don't use money that you have withheld for payroll taxes or sales taxes for other purposes. You will be a trustee of funds belonging to the Internal Revenue Service, Social Security Administration, and your state's sales taxing authority. A "payroll service provider" can be used to manage these responsibilities.
  • Keep in mind that liquidity is not the same as making money. You can be making a profit and still go broke by running out of cash. Learn and practice cash flow control.
  • Look ahead and write out your list of projected financial requirements including premises, equipment, staff and working capital.
Arrange for financing well before the need arises.

Top Ten Do's and Don'ts

THE TOP TEN DO'S
  1. Learn basic accounting before you go into business. Go to school if necessary.
  2. Consult and retain an accountant familiar with your industry before you start.
  3. Determine what accounting software program works best for your business.
  4. In the beginning, do your own bookkeeping to gain knowledge of your accounting.
  5. Set up inventory policy and internal controls including safeguards against dishonesty.
  6. Reconcile your bank account at least once a month when your bank statement is received.
  7. Maintain and update your cash flow control spreadsheet monthly.
  8. Plan to outsource your payroll and payroll reporting to a payroll service provider.
  9. Prepare financial statements, at least, monthly.
  10. Keep your business records separate from your personal records.
THE TOP TEN DON'TS
  1. Delegate the authority to sign checks to anyone.
  2. Use money withheld for payroll taxes or sales taxes for other purposes.
  3. Commingle personal assets with your business assets.
  4. Delegate cash flow projections--your lifeline to liquidity.
  5. Be optimistic in sales projections or conservative in expense projections.
  6. Rely on verbal agreements on any important matter including purchases.
  7. Pay an invoice without matching it to your purchase order.
  8. Delegate your relationship with your lending sources.
  9. Wait to establish credit sources until you have a need for financing.
  10. Overlook seeking advice from your accountant and lawyer on important financial matters.

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