The Value of Using a Bookkeeper

Close Up of a United States One Dollar Bill

Every fiscal year-end, business owners around the world take a look at their financial reports and, while some are pleasantly surprised that they did well, many are disappointed that they didn’t actually do as well as they thought and hoped for. Many small business owners blame their lack of business success on the economy and it is true, the current economy certainly does not make it easy to succeed.   In this economic climate, business owners cannot just “hope” that they will be able to make ends meet at the end of the month.  If a small business is going to succeed in a slow economy, the small business owner must first understand their financial situation.

A business owner is responsible for many aspects of running the business and it’s difficult to do it all independently. When small business owners try to take care of each and every task associated with their business, their personal life suffers and the part of the business they are passionate about suffers., On top of that, they can end up doing a mediocre job, and give up entirely on completing the accounting functions they could have easily offloaded to a competent bookkeeper.  A person going into business on their own has a passion for the goods or services they go into business to provide. Many small business owners don’t really have the time or desire to manage their bookkeeping and many overlook the vital importance of tracking and understanding their cash flow.   (I encourage you to read my post: “The Importance of a Cash Flow” for further detail.)

If you find yourself in this situation, find a good bookkeeper that will help you enter your monthly financial information into financial software, such as QuickBooks. Then take the time to review your Profit and Loss Statement and your Cash Flow Projection. It’s important that you understand what these reports are telling you about your business.  A good bookkeeper can help you use this information to make informed decisions   that will enable you to understand your overall financial picture, increase revenue, and control your expenses throughout the year; not just at year-end.

Many of my clients started out taking care of their own bookkeeping but found that they didn’t take the time to do a complete job. Month after month their bank and credit card statements were not reconciled. They hoped to get caught up but accounts became overdrawn and cash was always tight. Many hoped that in a month or two, their sales would pick up. Unfortunately, hope is not a concrete plan that will identify and implement the changes needed to increase sales and improve the bottom line.

Near the end of the year, I regularly receive phone calls from business owners that realize they need help. They tell me their bookkeeping needs to be completed in order to prepare their taxes. Many just want to get ”caught-up” with minimal hours spent entering the information. I understand the desire to keep the expense of bookkeeping down. However, I think too many small business owners make the mistake of underestimating the importance of updating their bookkeeping and cash flow projections each month.  When a small business owner keeps their accounting records updated, they have access to financial reports that will allow them to be proactive in making sure their revenue is steady and enables them to take advantage of additional opportunities as they arise. If you are determined to deal with all of your accounting responsibilities on your own, I encourage you to take whatever steps necessary to ensure that you are dealing with these tasks thoroughly and competently.  (I recommend a number of books on the ‘Additional Resources’ page of this website that many readers have found to be helpful.)  Every small business owner should have access to an accurate cash flow projection (see my free excel cash flow template for an example.)   If you don’t feel confident that you can create a cash flow projection and keep it updated on a monthly basis, you should strongly consider hiring a bookkeeper who can do it for you.

What should a good bookkeeper do for you?

A good bookkeeper should be easy to work with and should also be your advocate in business. This person should be proactive in asking for information that will enable them to update your financial reports. You should receive monthly financial statements and they should be available to review them with you.

If you have a good rapport with your bookkeeper you will not be afraid to work with them.

Weekly Cash Flow Projections Help General Contractors Intelligently Manage Their Projects

Dollar Bills and Coins Money

It can be very difficult for general contractors to understand the profitability of each project. If your business operates on a project-by-project basis there must be a system in place to track the quoted price of each job against invested time and expenses, to ensure that the profit margin doesn’t decrease unexpectedly. A great tool to help general contractors control their project expenses and avoid unpleasant surprises is the Cash Flow Projection.

In this blog post, I will give some examples of how the weekly Cash Flow Projection can be used and some tips that can help small business owners organize this information.

Weekly Cash Flow Projection

Most general contractors work on a cash basis and collect a deposit prior to the start of the job to cover their initial time and expenses. However, this can be a huge source of stress for both the contractor and the client if the contractor fails to account for all expenses and cannot accurately estimate the timing of significant expenditures.  Much of this stress can be eliminated when the contractor creates a weekly Cash Flow Projection prior to submitting the bid to the client. I strongly recommend that general contractors create a Cash Flow Projection that is reviewed and updated on a weekly basis in order to detail and identify what the costs of the project will be, when the costs are estimated to be paid out and to show when client payments should be made. This will put the project in perspective with a visual format and can eliminate misunderstandings in the future.

The initial cost proposal to the client is foundational in its importance and arguably the most important part of the project. Costs to be considered include man hours, supplies, and taxes.  A general contractor must not only take the time to estimate how many man hours the job will take; he or she must also consider matching Social Security & Medicare taxes, state worker’s compensation and any other payroll taxes an employer pays. This is where many general contractors get into trouble. Many times the cost of the employee’s payroll is projected and included in the cost estimate, but the costs of the employer paid taxes are not factored in.  When general contractors use a weekly Cash Flow Projection to estimate the cost of payroll and related taxes, this problem is eliminated.

Contractors must also accurately estimate the cost of supplies. Once the supply costs are estimated, they should be entered into the weekly Cash Flow Projection according to the schedule on which the contractor will have to pay for them.  For example, a contractor might estimate that it will take 2 months to complete a kitchen renovation. If the contractor plans to purchase appliances in week 7 of the project, the weekly Cash Flow Projection will identify this pending cash outlay, and the contractor can give the client ample notice of when additional funds will be required.

If your state collects sales taxes on these projects, the receipt of these funds need to be managed as well. You may charge and collect the sales tax with each periodic billing to the client. When the payment from the client is received, the sales tax should be set aside to be paid to the state when it is due. When a weekly Cash Flow Projection exists, a contractor will have a much easier time remembering to bill the client for sales tax, and subsequently submit the tax to the appropriate taxing authority.

The Cash Flow Projection identifies the cash balance for the project at the end of each week included in the projection. If any week in the weekly Cash Flow Projection shows a negative balance amount, another payment from the client should be scheduled and collected. The projection clearly identifies the weeks in which expenses are estimated to be paid out and allows the contractor to plan for the receipt of various periodic payments. The ability to provide clear expectations for the client regarding when project expenses will occur and when payments will need to be submitted is far better than having to run to the client and ask for payments without giving much warning.

The Cash Flow Projection only remains valuable when it is consistently monitored and updated to include any changes that occur with regard to the scope of the project. The cash balance that shows at the end of the final week of the Cash Flow Projection is your projected profit. By tracking your revenue and expenses with a weekly Cash Flow Projection, you always have the end result in view and can quickly identify project plans that must be revised in order to remain profitable.

Communication with the client is very important and when changes take place, a change order form can be used to communicate the change in the project costs. Both the general contractor and the client should sign this change order form so there are no disagreements with regard to the cost of the project when the time comes for the client to provide payment.

When drafting a weekly Cash Flow Projection for a project where the contractor is expected to purchase material and supplies, general contractors should include appropriate markups to cover the time, fuel and administrative costs of providing this service. This markup could be 5% or 10% as an example. If this markup is not added, the contractor is not compensated for the time and expenses invested to provide this service and the profit margin of the project is reduced.

When a contractor underestimates or loses track of costs and payments associated with one or many of the projects he or she is working on, contractors often compensate by using a deposit for a new project for previous jobs or overhead expenses.  Subsequently, the deposit is not used to cover the initial expenses for the job it’s intended for.  Once a contractor starts this down this path, it’s very difficult to get back on track and keep the costs separated. The client thinks payments they are making are being spent on their particular project, but in fact they are not.

It’s nearly impossible to track the true cost of a project if a contractor has been taking funds from one project to pay for another. If a general contractor has the ability to get a loan or use credit cards to complete the project(s) they haven’t yet completed and then separate the funds for a new project they can start fresh. Profits from new projects are then used to pay down the loan or credit card balances.

It’s also important for contractors to ensure that use of a weekly Cash Flow Projection does not take the place of consistent updates in bookkeeping software such as QuickBooks. Contractors should track revenue and expenses by adding “Classes” and then make sure that all costs are classified to the correct project. When a contractor sets up their QuickBooks data file using “Classes” they can generate a very helpful report called, the Profit and Loss by Project. This report provides the project totals for revenues and expenses that have already been recorded in the QuickBooks data file, but it does not allow for a week-by-week detailed view of the project; nor does it allow for projection of the future costs and revenues associated with the project.   The QuickBooks Profit and Loss by Project report is a very useful report for general contractors, but it is not capable of the same depth of utility that is provided by the weekly Cash Flow Projection.

Help Your Small Business Cope with Rising Gas Prices by Paying Attention to Your Cash Flow

In light of the sharp increase we’ve recently seen in the price of oil and gas, it is important to understand how these increases affect your profits and your cash flow. We see the cost of fuel rising when we pull into the gas station to fill up our own cars and we are painfully aware that an increasing portion of our personal cash flow is earmarked for this expense.  As business owners, we need to be attentive and intentional in the way we respond to rising gas prices with regard to our overall cash management strategies for our businesses.

Every Business is Impacted by Higher Gas Prices

Every order of goods and supplies your business receives is affected by higher gas prices. If you are a service business, such as an accountant, attorney, or insurance broker, expenses may increase slowly over time. If you are not paying attention, the higher cost of supplies may not be noticed until you review your cash flow and question the increase in costs relative to the same time the previous year.

If you own a business that relies on a lot of travel, either driving for meetings and deliveries, or flying several times a month to meet with clients in different cities, this increase will be much more obvious. Pizza deliveries and plumbers are prime examples of the types of businesses that will immediately identify the source of strain on their cash flow. The rising cost of fuel is directly felt and shows up on their bottom line.  Business owners who travel by airline regularly may not discover the source of their cash crunch as readily, but rest assured, in an environment where 35% of an airline’s total expenses are fuel costs, you can bet that they are looking to pass the expense along to you!

The impact of rising gas prices on businesses is astonishingly far-reaching.  Consider the example of a florist. The florist must purchase fresh flowers for arrangements, and subsequently deliver those arrangements to customers. The florist finds that the cost of fresh flowers has increased.  The nursery that the florist deals with explains that this is due to the higher cost of fertilizers (which are made with petroleum products), in addition to the rising cost of the fuel used to deliver the flowers to the florist. The florist has already paid more for their flowers, but they must also spend more on the fuel used in delivering finished arrangements to their customers.  There is an endless list of examples like this, which illustrate the ripple effect of rising gas prices that is felt in every step of the distribution process.

Your Cash Flow Projection Will Help You Identify a Cash Crunch Before it Becomes a Crisis

When a business owner is not aware of how the higher cost of fuel affects their business, they can quickly discover that the prices they are charging have minimized their profit margin to the point that they are in a crisis. By monitoring your costs (using your Cash Flow Projection) at a minimum of a monthly basis, you have the information you need to make corrections as needed.

These corrections may include raising prices of products and/or adding a surcharge to deliveries. However, many businesses have already cut their profit margin just to compete in today’s market and raising prices may make it difficult to remain competitive. In that case, business owners must focus on their expenses. It can be difficult to determine where a business can cut costs without jeopardizing quality.  (An excellent book on the subject of cutting costs without compromising on quality is Eric Ries’ New York Times Bestseller, “The Lean Startup.”  Don’t be misled by the title, Ries’ principles can be applied to established businesses as well. )

When evaluating my own business, I found that I was able to reduce expenses and save time by tapping into several online services.   For example,  is a service that saves me from having to visit the post office; I can print my own postage in the appropriate amount without leaving my desk.  Eliminating a middle-man is always nice and and have both helped me do that.  I’ve used Uprinting for postcards and business cards and Wix to set up a flash-based website with very little effort.  (Both sites have easy to use templates that can eliminate the need for a graphic designer/web developer for simple projects.)  I keep an updated list of resources that I’ve found helpful to my business on this site and I encourage you to take a look: Smart Business Cash Flow Additional Resources Page.

Use Your Cash Flow Projection to Inform your Decisions About Future Business Activities

In circumstances where cutting expenses does not provide sufficient relief, a business owner may have to be willing to take a serious look at his or her business plan and consider making radical changes to what products and services are offered and/or reconsider how the business can better differentiate itself from competitors.

The rising cost of fuel impacts every business in some way and I’d love to hear how you’ve been managing this challenge in your business.  Have you raised your prices or lowered your expenses – or have you found something else that works for you?  I encourage you to leave your feedback in the comments section below.

No matter what your approach has been, I hope this post has helped to illustrate the importance of paying close attention to your Cash Flow Projection.  A business owner cannot begin to address the myriad of issues associated with rising fuel costs until he or she recognizes that the issue exists.  If you haven’t started your Cash Flow Projection yet – I’m glad you’re still reading!  Take advantage of my free Cash Flow Template (Microsoft Excel) and take a moment to read my post which explains “The Importance of Cash Flow.”  When you’re ready to get started setting your Cash Flow up, Smart Business Cash Flow provides step-by-step instructions for doing so, starting with my post, “Cash Flow Projection and the Shortcomings of Total Reliance on the Profit and Loss Statement.”

Small Business Cash Flow Projection and Cash Management Strategies for the New Year (Part 2)

Part 2 of 2

I’m glad you’ve returned to the Smart Business Cash Flow blog in order to read the second part of my post on small business cash flow projection and cash management strategies for the new year which deals specifically with making a detailed review of your expenses.  If you missed the first half of this post, I encourage you to read part 1 (Small Business Cash Flow Projection and Cash Management Strategies for the New Year: Make a Detailed Review of your Revenue Streams) before you get started.

Make a Detailed Review of Your Expenses

Perform a detailed review of your expenses in order to determine whether you still need all of the products and services you are paying for. Consider whether or not your needs will change in the coming year based on the amount of revenue you plan to bring in. Will the planned revenue increase prompt you to hire more personnel? Do you anticipate any other changes that will increase or decrease your expenses?

  1. Decrease Your Costs While Maintaining Quality:If you want to maintain increased revenue streams you must be intentional about keeping your expenses as low as possible without compromising the quality of the products and services you provide. You also need to maintain a high standard for the quality of the people you employ in addition to the environment they work in. Invest some time in researching your highest costs. Are there new products and services available that can do the job the same or even better? With new technologies popping up all the time you may find an improved and/or more cost-effective solution.I’ve found it easy to implement several simple changes that have saved my business both time and money.I use nearly every day to print USPS approved postage directly from my computer.  This saves myself and members of my staff from spending time at the post office picking up postage or standing in line to ship standard or priority mail. is a great resource for inexpensive business cards, postcards and flyers.  Their online templates are easy to use and save you the expense of employing a graphic designer to create your print publications.  I’ve also used to create professional-looking, flash-based websites.  Their interface is completely drag and drop and it is simple to work with even without any web-development experience.  I encourage you to visit the Smart Business Cash Flow Additional Resources page for more time and money-saving ideas for your business.
  2. Plan for Staffing Changes:Will you need to hire additional personnel or reorganize your existing staff? This decision needs to be made with utmost care. Take a look at what your current personnel are doing. Review their job descriptions and determine if what your employees are doing is the primarily the same as their job descriptions or if their duties have changed? Do you need to re-task employees with different duties that will be more in line with your new year plans? Staffing is one of the most (if not the most) costly parts of running your business. You want to make sure you have structured your employees’ work environments and duty assignments so that they are as efficient and productive as possible.
  3. Evaluate your Need for and Ability to Repay Additional Financing:
    This is another decision that needs to be made with care. If you think you need additional financing, make sure you plan appropriately for making the loan or outside financing payments. These payments must be a part of your cash flow projection. Consider the effect that the loan payment will have on your comprehensive cash flow projection picture based on a low, medium and high expectation of the additional revenue you plan to bring in. The obligation to repay your financing will have to be met even if you don’t meet the projected increase in revenue, so have a plan to be able to cut back on expenses in order to be able to make your loan payments in case it becomes necessary.

Before implementing any changes to your overall cash management strategy, take time to read my post on Taking a Look at the Bottom Line of Your Cash Flow Projection to analyze how your changes affect the bottom line of each month and make sure you still have a cash positive situation.

It’s very important to review your cash flow at a minimum of a monthly basis so you can monitor your growth and make sure you are able to operate realistically in light of the changes you’ve made to your cash management strategy. Remember you have a greater chance to achieve your goals and be successful if you constantly monitor your cash flow projection and make changes along the way. If you procrastinate and only evaluate your cash flow at the end of the year, you will almost certainly have wasted valuable opportunities to bring in the additional revenue you want to make.

Small Business Cash Flow Projection and Cash Management Strategies for the New Year

Part 1 of 2

As your small business begins a new year it is vitally important that you both review the profitability of your business over the past year and identify the improvements that you plan to implement as a part of your overall cash management strategy in order to increase profitability over the next twelve months.

The first step is to review your sources of revenue and expense which provide a comprehensive representation of your cash flow situation over the previous 6 to 12 months. This will be easy if you have already set up your cash flow template and have recorded your actual cash flow data as explained in my blog post: Monthly Updates to your Cash Flow Projection. If you have not already set up your template, you can download the Smart Business Cash Flow Cash Flow Template and read my blog post: Starting a New Cash Flow Projection in order to get started. If you are beginning a new cash flow projection be certain, at a minimum, to enter your actual cash flow data for the previous month.

Once you have captured your actual cash flow data you are ready to begin preparing a cash flow projection for the next 12 months. This process will help you plan intelligently for your cash flow requirements throughout the new year as you take a detailed look at your revenue and expenses. There are many questions to consider as you prepare your cash flow projection; I’ve listed a few to get you started.

Make a Detailed Review of Your Revenue Streams

Take a look at your current line of products and/or services and give consideration to any new offerings you plan to make to customers. Be brutally honest with yourself about what has and has not worked in the past year and take a look at possibilities for making improvements to your gross profit.

  1. Gathering Revenue Data for your Review:
    Use your accounting program to run a report that shows the revenue you generated in the past year. (If you don’t already use an accounting program, I highly recommend QuickBooks. It is a great tool for small business owners, regardless of your level of accounting expertise.) Run your Profit and Loss Statement for the previous year to review the different categories of revenue you generated. Finally, run a sales summary report by item or category in order to review each group in more detail. As you review this information, consider each revenue category to determine if it is reasonable to expect that your business will bring in the same amount of revenue for each product and/or service that you provide, or will variables such as the economy, competitors or new technologies impact your expected performance in the coming year.
  2. Evaluate the Costs Associated with Offering your Products and/or Services:
    Can you use the information you have recorded in your accounting program to determine the direct costs to the revenue and sales you’ve had for each category? Do you anticipate that your costs for each category will decrease, stay the same or increase over the new year? Can you identify what changes may occur if you increase or decrease sales in one or more categories.
  3. Brainstorm Ways to Increase Revenue:
    While evaluating ways to increase the amount of revenue for your business, be sure to consider new revenue streams in addition to improvements you can make to existing product and/or service offerings. Can you add another revenue stream? Should you stop providing products and/or services for those categories that have been less profitable over the last year? Do you need to increase or change your marketing efforts in order to increase sales? Brainstorming always works best when you keep an open mind. Make a list of any ideas that you come up with and then return to it later to further develop your best ideas while crossing off the thoughts that merit less of your attention.

This review of your revenue streams is a great first step toward preparing your overall cash management strategy for the coming year. Be sure to visit Smart Business Cash Flow again next week to read the second half of this post where I will walk you through the final step: making a detailed review of your expenses.


What Does the Cash Flow Projection Say About How Much I Can Pay Myself?

Twenty Dollar Bill with Penny

How much can a small business pay the owner on a monthly basis? Regardless of whether you are the owner or the bookkeeper, if you are in charge of payroll for a small business, you will eventually have to address this important question. Business owners want to receive a monthly salary or draw from the business but often don’t know how much to take. Many business owners want to pay themselves a predetermined amount each month. It is felt that their time and hard work are worth the amount that they have named and though they are often correct, available cash is not always equal to the value of their time and effort. It is incredibly frustrating to pay yourself only to find that you must return the money to the business in order to cover expenses. The good news is that you can avoid this situation completely if you take the time to accurately prepare your cash flow projection before you determine how much the business owner should be paid each month.

The issue of determining the owner’s salary reaffirms the importance of updating your cash flow projection on a monthly basis. Once you have recorded your actual revenue and actual expenses for the previous month in your cash flow projection (as explained in my post titled: “Monthly Updates to Your Cash Flow Projection”), review your Cash Position at the end of the previous month and identify how much cash was left over. Now take a look at the columns that project income and expenses for the next few months on your cash flow projection and determine how much cash is projected to remain at the end of each of these months. As you consider these balances, don’t neglect to keep cash reserved for liabilities the business will have at the beginning of the next month, such as taxes that need to be paid and unforeseen emergencies that may arise (as explained in my post titled: “Taking a Look at the Bottom Line of Your Cash Flow Projection.”) Once you know you have funds available to pay for everything else you can see how much cash the business has available for paying out your salary or draw.

As a business owner you are responsible for making sure all of the obligations of the business are paid. If you have employees, you should plan to compensate yourself after you have paid your employees and their payroll taxes. Resist the temptation to use the cash withheld for employee payroll taxes as a “loan” from the IRS, even if your cash position is poor. Many business owners can attest that the interest and late-payment penalties associated with this type of mistake can add up quickly and cause serious repercussions for both yourself and your business in the long-term.

New business owners may be surprised by the amount of time it takes to build up the revenue stream of their business. While it is, of course, desirable to begin taking an owner’s salary or draw as soon as possible, entrepreneurs are wise to evaluate the monthly expenses and other cash outlays that their business will incur prior to determining how much they will be paid. In the beginning most businesses operate on a tight budget out of necessity and even those businesses that have funding from outside sources must carefully project how long those funds need to last. It isn’t at all uncommon for owners to find that they have to go without taking a salary or draw in the early months of their new business venture in order to stretch those funds until revenue is being generated and received on a consistent basis.

Keep in mind that as your business grows and begins to consistently generate revenue, the cost of running the business will almost inevitably also grow. This is just one more reason that it is very important to keep your cash flow projection up to date!


Cash Flow Projections for Seasonal Businesses

Dollar Bills and Coins

How do cash flow projections affect seasonal businesses? For the purposes of this discussion, we’ll consider a seasonal business to be either a business that is subject to definite peaks and declines in revenue based on the time of year, or a business that only operates during a specific, predictable season.

For example, many retail businesses depend on the marked increase in sales which traditionally begins on Black Friday (and endures throughout the Christmas season.)  During this season, retail businesses must pre-order and store higher inventory and hire extra personnel. Other examples of seasonal businesses include landscaping and nursery businesses, which have more work in the summer, and tourism-dependent businesses located near ski areas and other season-driven resorts that may elect to offer limited services or completely shut down during the “slow-season.”   In order to be successful a business must plan for these predictable fluctuations in revenue and monitor their cash flow position carefully.

It is vitally important for a cash flow projection to be prepared, updated and referenced regularly before, during and after the busy season for businesses which depend on these revenue peaks to carry them throughout the slower times of the year. A one year cash flow projection helps seasonal business owners avoid the stress of “guessing” how much cash is likely to be available during their busy season.  Business owners can take the more definitive information provided in their cash flow projection and use it to plan intelligently for reserving cash to be used to sustain the business during the slow-season, or at least better predict when and if they will need to tap into a line of credit.

You may ask yourself, “Where do I start?” Getting started is usually the hardest part of setting up your first cash flow projection.  Let me assure you that if you break the process up into smaller, more manageable pieces, you will find this undertaking to be easier to accomplish and your finished product will be much more accurate and useful as a result of your efforts.  If you have not yet started your cash flow projection, go back to my post titled: “Where Do I Start?” and  begin there. If you don’t have the time or the patience to do the initial set up on your own, talk to a bookkeeper or contact me.   The misinformation provided by a hurriedly assembled, inaccurate cash flow projection can do more damage than having no cash flow projection at all.  It is well worth the exchange of time and resources to have the initial cash flow projection template set up properly so that you can continue the projection with confidence from that point on.

Once you have your cash flow projection template set up, you should go back to your previous two (or more) years and review your actual revenue. What months did you have the highest revenue for your business?  Is there a fluctuation of when your “busy-season” begins or is it basically the same each year? If there is a significant difference of when your busy-season begins and ends each year then you need to do your best to determine what variables will influence your specific revenue streams and estimate when the next “season” will begin and end. If this is a new business, you’ll need to get revenue projections from either your business plan or your budgeting process. Start on a high note: enter the monthly estimated sales that you project for the busiest months on your cash flow projection. Then take a look at the other months surrounding that. If you keep your business open year round you should be able to use your historical data to project sales during the slower months of the year as well. If you completely close up shop during certain months of the year then record a brutally honest “0” in those months. Rely on the historical data that you have collected to guide your revenue projections.  Approaching this task with either too much optimism or pessimism will degrade the utility of this valuable business planning tool.

Now, we need to consider the expense portion of your cash flow projection. Approach your expense projections like a puzzle with your fixed costs forming the corners and outer frame of the puzzle and your variable costs comprising the interior pieces which fill up the rest of the picture you are trying to create.   Your fixed costs are things like rent, utilities, insurance, etc.  These are items that will cost the same, predictable amount each time they occur.  After you’ve identified your fixed costs, you can review your variable costs. Variable costs will include inventory, supplies, personnel, taxes, etc. Important questions to ask as you project your variable expenses include:

  • When do you need to order inventory? This may be a number of months before your “season” begins.
  • When do you need to start hiring extra personnel? Make sure to include all costs of the hiring process such as recruiting, background checks and training.
  • When do you anticipate that your higher personnel costs will begin? Extra payroll and payroll taxes must be calculated as close as possible. Many small businesses get into trouble because they don’t accurately project all of the payroll taxes that they will be liable for as a result of increasing their staff. Extra fees or penalties that are incurred as a result of such oversights cut into your profit margin and cause unnecessary stress.  If you plan ahead for these items you should not have to pay them.
  • Will advertising costs be a factor?  If you plan to advertise in print or online they almost certainly will be! Review your advertising budget for the year and be sure that those liabilities are recorded in the expense section of your cash flow projection.

You may find that funds for the increased expenses that you will incur prior to your sales peak may need to be borrowed and then paid back in time for future purchases to be made. This is a cycle of borrowing that many businesses face. If you know in advance that at some point, you will depend on external financing to provide the cash you need to cover the cost of doing business, then your cash flow projection must show when those funds will be deposited into your checking account and you must also include an expense line item that shows how much you plan to pay back each month for both interest and principal.

When working with your financial institution you will be asked how you plan to pay back the loan or line of credit.  A cash flow projection will be a key report that will give your lender confidence that you are willing and able to competently manage the cash that you are borrowing.

Monthly Updates to Your Cash Flow Projection

Money and Couins and Dollar Bills

Each month it’s important to update your Cash Flow Projection with actual figures from the previous month and to review your projected numbers in light of all of the information that you have collected to date. In this post, we’ll look at a step-by-step guide to accurately capturing all of the monthly updates that need to be recorded in your Cash Flow Projection.

Step One: Reconcile Your Bank Statement

The first step is to reconcile your bank statement. This will ensure that you have entered all transactions into your check register. If this important step is one that you’ve been avoiding in previous months, now is the time to make this a priority. You cannot hope to benefit from all of the hard work that you have put into your Cash Flow Projection if you are not sure that includes all of your transactions. Additionally, it is dangerous to forgo the work that goes into properly recording and reconciling your bank transactions in favor of a quick glance at your balance via your bank’s website. If you’ve been managing your cash flow this way it is just a matter of time until something slips through the cracks. Committing to take the time to consistently reconcile your bank statements now will almost certainly save you time, stress, and even money (overdraft charges, late fees, etc.) in the future.

Step Two: Gather Your Data

Once you’ve confirmed that you have accurately captured all of your financial transactions, the second step is to gather all of those transactions in a format that makes it easy to record your data on your Cash Flow Projection. Often, the most efficient way to do this is to run reports from your accounting software. I use QuickBooks for most of my clients and in order to simplify this process, I have saved the appropriate set of reports in my Memorized Report List. Even if you are using another accounting software program, you can use these same reports.

The list of reports I use to update my Cash Flow Projection are as follows:

  • Bank Transaction Report or the Check Register
  • Deposit Detail Report (This will vary depending on how you are tracking your revenue.)
  • Accounts Receivable Aging (If you are a business that bills customers for time and/or products.)

Step Three: Record Your Expenses

The third step is to take your Bank Transaction Report or Check Register and enter the expenses into the various categories you have listed on your Cash Flow Projection. If you have created categories on your Cash Flow Projection that differ from the chart of accounts in your accounting software, take extra care to be sure that you are recording activity from each chart of accounts category into the same Cash Flow Projection categories each month. For example, you may have payments to a number of different vendors which are recorded in the following expense categories on your chart of accounts: Office Supplies, Kitchen Supplies, and Printer & Computer Supplies. Conversely, you may have set up your Cash Flow Projections so that “Office Supplies” includes paper and pens, but also include kitchen supplies, printer and computer supplies, cleaning supplies etc. As long as you record this data consistently from month to month, this is fine and it will not negatively impact the utility of your Cash Flow Projection.

Step Four: Record Your Deposits

Once you have entered all the payments from your Bank Transaction Report or Check Register to your Cash Flow Projection it is time to enter the deposits you have made. The entries you make to your Cash Flow Projection depend on how you are tracking your revenue. If your Cash Flow Projection is detailed by product or by customer then you will want to record the deposits you made in the same manner. You can set up your Deposit Detail Report to organize the breakdown of deposits you received by customer or by the revenue categories you are tracking. Make sure that the report you set up is on a cash basis, as opposed to accrual basis. (For more information on the important differences between accrual and cash basis reporting, reference my blog post: Cash Flow Projection and the Shortcomings of Total Reliance on the Profit & Loss Statement.)

Step Five: Review Your Bottom Line

The fifth step is to look at the bottom line; this is the cash position/ending balance on your Cash Flow Projection. This final calculation should consider all of your actual revenue and expenses for the month and absolutely must match with the ending balance from your Bank Transaction Report. If these numbers do not match, then you will need to identify and correct the discrepancy. It is vitally important that these figures match exactly so that your Cash Flow Projection can accurately provide insight into your current activities and so that the beginning balance for the next month is accurate as well.

Once you have completed these five steps, take the time to review your Cash Flow Projection paying careful attention to the columns with your projections. Have new developments occurred in the business that will impact your projected amounts? (Review my posts on expense projections and revenue projections if you need help identifying items that may change your projections.) If so, don’t be afraid to make those changes on your cash flow projection. Remember this is your working tool and you must have realistic projections entered if it is going to provide any value to you. This is also the time to add one more column to your projections so that you will always have 6 (or 12) months forecasted in order to allow you to look ahead and spot any possible risks to your cash position.

Taking a Look at the Bottom Line of Your Cash Flow Projection


If you are following the process of creating your cash flow projection as it has been detailed here on the Smart Business Cash Flow Blog, then you have set up the Cash Flow Projection Template and entered data from your most recently completed month which includes all actual revenue and expenses. You have also reviewed and entered projected revenue and expenses for the next 6 (or 12) months.

Before we take a look at the final section of the cash flow projection, take some time to review the bottom line (cash position/ending balance) for all of the projected columns. This is where you can identify and evaluate the big picture. You now have the ability to make informed, smart business decisions, in order to manipulate the bottom line based on the facts you have gathered about income and expenses.

The ending balance shows how much cash you have available at the end of each month which will then be available to use for expenses during the beginning of the next month. How does your cash flow projection look? Do you have a positive cash flow balance in each of the columns? Do you have months where a negative balance exists? The optimum balance is one which shows that there is enough of a cash balance at the end of each month to cover 2 to 4 months of overhead expenses (which may be needed in emergency situations.)

It can be discouraging to complete your cash flow projection and find that there are columns that have negative balances, as this means that you are projected to spend more money than you make in those months. If this is the case, then you will need to take a good look at the revenue you have projected and then take the time to brainstorm ways to increase sales. Can you have a promotion or sale to drive your revenue higher? Can you offer a payment discount (such as a 2% discount when customers pay within 10 days) to speed up the rate at which your customers are making payments? Your marketing plan is a vital part of this process so be sure to take it into consideration when you evaluate your ideas for increasing revenue.

If you have negative balances, you also want to take the time to review your expenses. Can any expenses be paid for in a subsequent month when you expect your revenue to be higher? Can any of these expenses be reduced or eliminated entirely?

If you have a line of credit with a bank for these types of short term needs and you are not able to adjust your revenue or expenses, then this would be the right time to tap into it. Remember, if you use your line of credit then you must also include the related principal and interest payments into the expense portion of your cash flow projection on a monthly basis until the funds you borrowed have been paid back to the bank.

If your cash flow is positive across the columns, the next step is to look at any existing loan obligations, capital purchases you need to make and owner withdrawals you may need or want to pay out. These are items that are considered separately from your regular monthly overhead expenses. For example, you may elect to use the extra cash in the business to pay down an existing loan. By paying down or paying off a loan you will save on interest expenses and better the position of the business for any future cash needs by continuing to save or by continuing to reduce your liabilities so you can borrow again in the future if needed. Remember to enter the amount of these payments as an expense in each of the monthly columns that you can afford to make these payments from.

You may need to purchase new equipment in order to replace worn or outdated equipment that cannot or should not be repaired. If this is the case, estimate the month in which you will need to make this purchase. There may be a staggering number of decisions to be made and options to be selected as you consider the purchase. Will you make a down payment and borrow the rest? Can you pay cash for the purchase and save on the cost of the equipment? Large equipment purchases should be considered carefully and I look forward to providing more insight into this topic, which is often stressful for small business owners, in subsequent posts.

You may want to make a cash outlay for an Owner’s Withdrawal in order to pay for personal expenses. Many small business owners have asked me if guidelines exist for how much they can pay themselves. Some business owners can elect to receive a payroll payment, others can take an Owner’s Withdrawal and some can take both. It’s best to check with you CPA to determine what you can legally do in light of IRS rules and regulations. Internal Revenue Service notwithstanding, part of the answer to the question of how much can you pay yourself will always depend on the value of the positive ending balance on your cash flow projection. You obviously can’t pay yourself if you have a negative balance. Once you’ve reviewed your ending balance and considered your personal needs, enter the amount you plan to pay out to yourself in the monthly column and examine the effect of the expenditure on your bottom line. Can you afford to take that amount out of the business and still have funds to pay your monthly expenses? Will you retain enough cash to deal with 2-4 months of overhead expenses should an emergency arise?

There is a great deal of information to consider as you work with your cash flow projection, but the effort and time that you devote to this process now will reduce stress and help to provide peace of mind in the future. Remember to interact with your cash flow projection as a dynamic document that will continually adapt and change in the same ways that the realities of your business finances fluctuate. Once you’ve taken these initial steps you must continue to update your actual revenue and expense data and review your projections, making the appropriate adjustments as time goes on.

Taking a Look at Expense Projections

Money: Coins, and Dollar Bills

In this post, we are going to focus on the expense portion of the Cash Flow Projection. If you’ve been participating in this discussion of Cash Flow Projection since our first post then you should have your Cash Flow Projection Template set up and have your first month of actual figures for both income and expenses entered. You should also have the Revenue section (the top section of the Cash Flow Projection) complete with the next 6 (or 12) months of projected sales entered.

Our next step is to take a look at the expenses you are projected to have in the next 6 (or 12) months. Just like we did for the Revenue Projections, we want to look ahead and predict what expenses you will incur. Take a look at the expense categories that you have listed on your Cash Flow Projection. You may have created broad, inclusive categories such as payroll, office expenses, and communications or you may have a more detailed listing of individual accounts such as gross payroll, payroll taxes, payroll benefits, office supplies, small office equipment, telephone service, internet access, cell phone, etc. Remember, you are setting up your Cash Flow Projection so that it makes the most sense to you; be sure to tailor the level of detail in your account listing to suit your personal preference.

Look back at what your expenses were during the last 6 months and ask yourself whether your existing expenses have been historically consistent or have been steadily or suddenly increasing. Additionally, you need to consider expenses that have stopped and no longer exist, along with those expenses that will be new for your business. Taking the time to make a thorough examination of your last 6 months of expenses will help you make sure you are not forgetting an expense, so do not omit this important part of preparing your Cash Flow Projection. Keep in mind that the frequency with which some of your recurring expenses occur will vary; don’t focus exclusively on your monthly expenses while overlooking expenses that occur on a quarterly and annual basis.

While reviewing your records to identify your expenses it is important to remember that some outlays of cash don’t show up on the Profit and Loss Statement. Consider the following examples:

  • Loans and/or Leases
  • Credit Card Payments
  • Sales & Excise Taxes
  • Quarterly Payroll Taxes
  • Owner’s Draw

These payments are only recorded on the Balance Sheet. For example, if your business received a loan, then the loan amount would have been entered as a credit to the Liability section of the Balance Sheet and a debit to your checking account. Over time you have an obligation to pay back this loan. Each month you make a payment (a credit to the checking account) and pay down the loan principal (a debit to the loan account.) Both of these entries are recorded on Balance Sheet accounts and will never appear on your Profit and Loss Statement. This is a great example of why a Cash Flow Projection is so important. If you are only looking at the Profit and Loss Statement as you plan for the future of your business, then you will miss these types of impending cash obligations.

Now look ahead and project what your expenses will be going forward. Here are some questions to ask.

  • Have you or will you add any new expenses over the coming months?
  • Do you anticipate that you will add or lower the number of employees you have?
  • Will you experience a rent increase?
  • Do you have equipment or uniform leases that are subject to automatic increases?
  • Did you make purchases at a promotional interest rate or with a zero payment period that are scheduled to increase to their regular payment amount?
  • Do you have plans for advertising or promotional events?
  • Do you anticipate that the cost of products will increase?

As I mentioned in my previous post, “Taking a Look at Revenue Projections”, you may not have all the answers. It will be well worth your time to consider which people in your company have the information that you need and then take the time to solicit this information from them.

The expense projections you enter should be realistic based on information you currently have. Your Cash Flow Projection should reflect the current situation at your business, and change when your business changes. If a month from now you receive information which indicates that expenses will change, you will update your Cash Flow Projection accordingly at that time.