How to Define Positive Cash Flow
Positive Cash Flow is a key component of a business not only surviving but thriving. Many new businesses implode because as they develop their business models, they omit to consider when cash flow will become positive: in other words, when there will be money available to cover operating costs, costs of goods and services, and all other expenses related to the business. To illustrate, say your customer DoDaDay, buys $1000 in goods on May 15. Your invoicing is Payment Due within 45 days, so you should (ideally) receive a check by July 1. So while you have $5000 in sales, the revenue is "pending," meaning you don’t have the cash flow yet. But during those 45 days, you will have to pay rent, salaries, and other operating expenses. Where do you get the money?If you don’t have Positive Cash Flow to cover those expenses during that time, you will need to source cash, which is why start-ups often seek financing or loans: to provide a base of capital to fund the business while waiting for their own positive cash flow.A smart business projects Cash Flow to determine when it will become positive. So how do you project your Cash Flow?
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Instructions
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Determine Positive Cash Flow
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Calculate your monthly Sales or Revenues going out at least a year.
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Understand payment patterns. Don’t assume everybody pays on schedule. Some may pay early, especially if you offer a discount. Many will mail it out on the due date so they’re paying at 45 days,which means it could be 3 or more days before you receive the check.
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Determine your monthly Payments Received income. A good starting point is that you’ll get 20% of payments during the month of the sale; 70% during the first month after the sale, and 10% during the second month after the sale. If you have $10000 in Total Sales for May, then $2000 in cash will be available in May, $7000 in June and $1000 in July.
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Deduct monthly Costs of Goods and Services and all Operating Expenses to calculate your net cash inflow. For example, if you have $2000 in cash (payments) in May, and your Costs and Expenses are $4000 per month, your Projected Cash Flow for May is negative $2000, meaning you’re operating your business at a loss. In June, when you get $7000, you will not only subtract the monthly $4000 in Costs & Expenses, but also carry over the $2000 loss. So you will have a net positive cash flow of $1000.
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Do a 12-month monthly Projected Cash Flow analysis, and update regularly. Unforeseen expenses are typical in business, which is why it’s important to keep some cash reserve on hand. If your projected cash flow analysis indicates little or negative cash flow over time, then review your business model and determine what to do to improve cash flow to the positive.
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Tips & Warnings
Take a look at the Sample Cash Flow Analysis in Additional Resources below to get a better sense of how to do an analysis for your own business.
