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The cash flow statement is designed to track cash as it flows in and out of your business. It shows the causes of cash flow shortfalls and surpluses. If the cash flow is positive it indicates that the business is funding its daily operational working capital needs without the injection of external funds. If the cash flow is negative it indicates that external funds are needed to provide the working capital for business operations.

Most businesses require cash to invest in new fixed assets such as new equipment, machinery, real estate, etc. When a company does need cash for investing it must come from internal operating cash flow surplus or from external financing.

The increase or decrease in cash number at the bottom of the cash flow worksheet that follows will show you the net result of operating and external investing or financing. You will be able to use the cash flow worksheet to analyze your sources and uses of cash and the cash flow worksheet to be a valuable tool in understanding where and when cash is flowing in and out of your business.

Funding sources will carefully analyze your cash flow statement to see what is going on in the business. It is the cash flow statement that shows how much cash is generated and used by a business and for what. Depreciation is an expense on your income statement that doesn’t require cash are added back to cash flow. Accounts receivable is shown as revenue on the income statement but isn’t real cash and is removed from the cash flow calculation.

Ultimately funding sources are looking at the capital intensity of the business. How much cash has to go in before the business is able to sustain itself on it’s own cash flow.

Cash flow factors can be:

  • Seasonality – Does the business have revenue down periods?
  • Collection time periods – What is the typical A/R aging 30, 60, 90 days?
  • Accounts receivable growth – How many orders can the company manage?

The question then becomes, how much cash will this business require, what is the plan to fund the growth, and has the management correctly forecasted the need.

Having an accurate model of how much cash you will need and when that cash must be available, is vital to your business success. If you have any dreams of funding your business than I urge you to spend more time on your cash flow projections then on almost anything else. It is the key to your success.

Produce a detailed and supportable first year cash flow projections and then a summary overview of cash flow for the next four years.

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