Articles for Retailers - by Tom Shay


Polishing the Crystal Ball:  Utilizing a Cashflow Chart
by Tom Shay

You have undoubtedly had occasion where you have identified a trend within your business that began several months or even years ago. In identifying the trend, positive or negative, you are aware today of how you could have taken advantage of the situation if you had known the trend was developing.

Unfortunately, too often, you see it only as you review your past financial statements.

Many businesses gather their financial data each month and pass it to an accountant who delivers a financial report. Often this report is received more than 30 days after the end of the month.  
To make matters worse, when the report is received, many business owners will examine the gross revenue, net profit, gross margin and maybe one or two expense lines that have been reason for previous concern.  The financial reports, usually a balance sheet and a profit and loss statement, are then filed away.

These two financial reports are the first two essential components of sound financial management.  The third component is the cash flow chart, which is created by taking key bits of information from those financial sheets. A cash flow chart, whether created on a ledger pad or utilizing a computer spread sheet program, begins with the cash in the account on the first day of the month.  Add to that, the profit for the month. Then subtract from that the dollars spent for inventory, leaving a figure that will represent the cash on hand at the end of the month.

Using a program such as Microsoft Excel, the business owner can develop an elaborate cash flow chart.  The owner can input the previous twelve months of financial sheets and begin to make forecasts for the next 12 months.  By changing from the historical figures of sales, margin, and inventory levels, to projected figures, the business owner can anticipate the necessary cash flow.  As updated figures are entered each month, the near future becomes easier to predict and additional months can be added to the spread sheet so that there is a constant 12-month forecast.

Businesses that are using an accrual basis for accounting can further use a cash flow chart to calculate their purchases of inventory, equipment, and other expenditures which will be paid for in the following two to twelve months.  Too often a business, riding the crest of increased sales, over extends itself in purchasing inventory or making improvements to the facilities.  A cash flow chart would quickly show a business that the appearance of excessive cash today is actually the dollars necessary for the next few months.

It is important that a cash flow chart be kept up to date.

The idea of a business creating a cash flow chart is not to replace your accountant because, for example, if you needed a line of credit, the services of an accountant would be crucial in creating the proper documentation for a bank.

That said, it’s important to remember that many accountants are looking at a business from a historical perspective as compared to the position of an owner/ visionary.  Both positions are necessary, but the business owner and the accountant cannot both look at the situation from the same perspective all the time.

Another factor to be concerned with is the timeliness in which the cash flow chart is created each month. Simply stated, if you want to be able to affect business in August, you need to complete your July cash flow chart within the first week of August.   

Utilizing a cash flow chart can help to anticipate the effect of a sales increase, a change in gross margin, or extended dating on the net income and cash position.

You may have thought the crystal ball only appeared in fantasy movies. But, the cash flow chart is a far superior way to see the future of your business.

Tom Shay is a fourth generation small business owner, author, columnist, coach and speaker who has authored several training manuals for retailers that can be found in the Resources section of the NAMTA website – His knowledge of small business marketing, business strategy, staffing, and financial management have provided small business owners with the help necessary to increase their profits plus build their business for the future. You can learn more here -