A successful entrepreneur with a good business concept may consistently register record sales and profits, but he or she can go bankrupt because of cash flow problems. Indeed, managing cash flow is a critical area in finance, one that can spell the difference between the success and failure of a business. So, just like a smart basketball coach who develops a winning strategy by reviewing the "stats" of his team\\\'s strengths and weaknesses, the entrepreneur should similarly monitor his or her cash flow "stats" to develop an effective financial strategy.
The lifeblood of any business is its cash flow. Without it, the business is like a bloodless person. If you are always unable to collect your accounts receivables on time, you won\\\'t be able to generate enough funds to pay for your operating expenses. Sooner than you think, you will be in financial distress and may even have to close shop. This is because the cash that goes in and out of your company is what determines your financial position. If you are in cash surplus, you can possibly invest the excess money in short term investments; if you are in cash deficit, on the other hand, you may need to source financing to bridge your cash shortfalls. Thus, for you to forecast and effectively deal with changes in your cash position, it is important to understand the various factors that affect your cash flow.
When you plan to forecast your cash flow, you may want to use the following template: Start with your actual cash ending balance from the previous month. Add to this balance your cash receipts during the current month, then deduct your cash disbursements during the current month to come up with your cash ending balance for the current month. This will also be your starting cash balance for the next month, with which you may now start with your projection of cash receipts and disbursement for that month.
For cash receipts, you will need to establish a realistic basis for estimating the next month\\\'s sales figure. If you have historical sales data from the previous year, it will be good to assume a seasonal pattern. For example, assume that your sales in December last year was P500,0000 and you noticed that there was a 30 percent drop the following January. Then, when you make your sales forecast for January in the succeeding year, you need to apply a 30 percent downward adjustment on your preceding December sales. Do the same process for the remaining months of the year to complete a 12-month forecast. (If you sell on credit terms or installment basis, you should be careful to consider only the portion of the receivable that you expect to collect on the specifi c month that you are forecasting.)
The sources of your cash collections will either be recurring or non-recurring. Recurring items are those that come from operations, such as sales to customers. Non-recurring items are those that come from investment and financing, such as capital advances from your business partners or proceeds from bank loans and other items of similar nature.