Many businesses start every year but don’t even make it 12 months before closing the doors. Although failure to plan, know the market, properly purchase products, properly hire employees and other operating issues contribute to the overall failure of a business, ultimately the most common reason for business failure is running out operating capital. Even business owners who understood the market and did months of research before opening can be caught by surprise if they lack an understanding of net cash flow.
Add all cash collections for the business for the current month after close of business on the last day of the month. Do not include credit card sales unless you have been credited by the credit card holder. If you allow customers to purchase on account, do not include account sales unless you have received payment. Include all payments received from credit holders and customers for purchases made before the current month.
Compare your total cash collections to the total amount of bank deposits for the month to verify accuracy of your total. You may discover minor differences due to non-operating deposits, such as deposit refunds, rebates and interest. If you make a significant amount of monthly interest on deposits, add the monthly interest amount to your cash collections total.
Determine a total amount of all expenses paid during the month. Include payments made by check, even if the check has not cleared as long as the check was issued during the month. Do not include expenses for which you have an invoice but have not yet made payment.
Subtract the total amount of all expenses paid during the month from the total amount of cash collected/deposited during the month to obtain net cash flow.
Many accounting software packages provide monthly cash flow statements that allow companies using accrual-based accounting an easy way to determine actual change in cash position from month to month.
If you are not certain how to calculate net cash flow, consider hiring an accountant to explain the process.
- “Principles of Accounting”; A. Douglas Hillman, Richard F. Kochanek, Corine T. Norgaard; 1991
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