Sponsored by the U. S. Small Business Administration
The Madison County Chamber of Commerce



To be competitive, small business owners must prepare for all future events and market changes. The most important aspect of preparation is effective cash flow planning. Failure to properly plan cash flow is one of the leading causes of small business failure.

Experience has shown that many small business owners lack an understanding of basic accounting principles. Knowing basics will help you better manage cash flow. There are also self-instruction guides from which you can obtain a more thorough knowledge of accounting.

The monetary supply of a business can be either cash on hand or in a business checking account available to meet expenses. A sufficient cash flow covers your business by meeting obligations (i.e., paying bills, serving as a cushion in case of an emergency, and providing investment capital.) The operating cycle is a system through which cash flows, from the purchase of inventory through the collection of accounts-receivable. It measures the flow of assets in and out of your business.

For example, your operating cycle will begin with both inventory and cash on hand. Typically, additional inventory is purchased on account to guarantee you will not deplete your stock as sales are made. Your sales will consist of cash sales and accounts receivable. Accounts-receivable are usually paid 30 days after the date of the sale. This applies to both the inventories you purchase and the products you sell. When you make the payment for inventory, both cash and accounts-payable are reduced. Thirty days after the sale of your products, receivables are usually paid. This increases your cash and reduces your receivables. Now your cash has completed its flow through the operating cycle and is ready to begin again.

Analysis of your cash flow will show whether your daily operations generate enough cash to meet your obligations, both current and future, and how major outflows of cash to pay your obligations relate to the inflow of cash from sales. This comparison reveals whether the flow is positive or a net drain on resources. Any significant changes over time will also appear. Understanding your cash flow will lead to better control of your cash position and will allow time to plan and prepare for growth of your business, The business owner's understanding of this analysis in very important and should be done monthly.

It is best to have enough cash on hand at the beginning of the month to pay all the bills anticipated for the month. Projecting cash flow on a monthly basis helps identify problems and identify surplus cash that can be invested in the business or in savings. When deficiencies are found, financial plans must be altered to provide more cash. The object of cash flow analysis and planning is to develop a plan to provide a well-balanced cash flow.

Your business can increase cash reserves in a number of ways:

Contact us by calling The Madison County Chamber of Commerce at (765) 642-0264 or write to:

Union Bldg, Suite 211
1106 Merdian Street
Anderson, IN 46016

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