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Cash flow is not hard to manage once you are aware of what information you need to track.  First and foremost, you need to know what the costs are.  Make a list of everything needed for your project. This will include expenses such as materials, travel, labor, tools, etc. Managing cash flow for small business starts here.

Second, you need to model the project out to see how you will be spending the project-related costs according to the schedule you plan to maintain.  Stress test the model to see what happens if the schedule gets pushed faster or the project gets delayed.  What if the payments you are expecting in 30 days take more like 45 – does that blow up the project for you?  Do you have the right terms with your suppliers?  Should you use your contract labor or direct labor?  Is it more important for me to have the right payment terms with the vendors I choose, or should I be more concerned about the price I pay them?

A Project Cash Flow model is another key tool to managing cash flow for small business and will help answer all these questions for you. Make sure you know how much money you need to execute the project as planned and earn the profit you expect to make when you bid on the project.  For an easy-to-use cash flow tool and calculator to accomplish everything discussed in this article, check out our MF online Cash Flow Tool here.

Cash flow comes in three forms: operating, investing, and financing. We’ll focus on operating cash flow, which is the money your business makes from selling goods or services. Basically, the money your company makes doing whatever it is your company does. Financial cash flow shows the money you use to fund your business, including debt, equity, and credit. Investing cash flow is money created from investment opportunities. Now let’s dive into the different types of cash flow and how to calculate operating cash flow!

Types of cash flow

There are three major sources of cash—operations (company revenue), investments, and finance (loans, lines of credit, equity raise). 

Operations cash flow is all cash generated by the purchase of your company’s main service or product. Most of a typical contractor’s cash flow will come from operations, from the work you perform. When you bill your customers or submit a pay app and then get paid, that’s a primary source of cash. Consider if you have other sources as you prepare your cash flow statement.

Investment cash flow includes cash generated by investments in capital assets or other ventures. An example of this may be the interest charged on a loan to an employee or an investment made in another business, or it may be Bitcoin that you bought in the business. 

Finance cash flow is the money you take in from debt or equity, less the payments you make on that debt or equity (known as “Debt Service”).

How to calculate operating cash flow 

Let’s say you own a luxury baby apparel boutique and you have a goal to increase revenue by 25% as compared to the prior year. To reach that goal, you’ll want to estimate the necessary additional expenses and cash needs in order to make that goal attainable and then track against those estimates all year. You will also need a budget, but that is for another chapter. Follow the steps below on how to calculate operating cash flow or utilize a Cash Flow Calculator to streamline the process:

Step 1: Determine your cash flow starting point. 

This is as simple as consulting your business cash flow report when you have one, but in the meantime, you will need to do a little work. Start with what is in your bank account(s) right now and add any additional sources of cash you have access to. Then add up all of the free cash flow from all other available Sources. This would likely be Operational cash flow. Next, you will need to choose a specific date to start from—oftentimes it makes sense to start with the end of the previous year because you should have a clean set of financials and/or a tax return that states specifically where you are at that period in time (December 31st). Then you can use that specific year as your “baseline” to project forward from. 

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Step 2: Estimate incoming cash flow for the next period. 

Based on historical cash flow tracking of Year A (the “baseline”), you can make a rough calculation of what the expected revenue will be for Year B. 

Be sure to account for any anomalies, positive or negative, in the historical data. For example, if your company was closed for several months due to the shutdowns related to the coronavirus pandemic, that will have a negative effect on your cash flow data that should not be repeated. 

Similarly, if you worked on a particularly large project—something way outside your normal scope—it is best to mark it as an outlier in terms of estimating cash flow. On the other hand, if you do have one-time events that you know are typical each year then you should account for those too. 

For example, you are going to purchase a truck this year or you know one of your customers is going to order in bulk at the beginning of the year versus consistently every month like in previous years. These are the kinds of things to think about when planning in this stage of the process.

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Step 3: Estimate outgoing expenses for the next period. 

Just like you did with your revenue, you’ll want to review and tally up all of the expenses from the baseline period in order to get a rough idea of what you will spend in Year B. In a perfect world you will estimate revenue and expenses at least on a monthly basis to start and plan for the year—then refine this down to weekly looking ahead 13 weeks at a time. Then as each week goes on you add a week to the 13 so you always have a 13-week “look ahead” of the cash needs of the business. The week you finished becomes what actually happened and you adjust the weeks coming up and add one more week to the end. This allows you to always have a line of sight to the next 13 weeks of your business.

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Step 4: Subtract the estimated expenses from the estimated revenue.

This one is pretty self-explanatory. Just like when you’re creating your cash flow statement, you need to subtract your expenses from revenue in order to arrive at your estimated free cash flow. This will give you the projected cash balance to end the period of time you are planning for. 

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Step 5: Estimate your starting and closing cash flow for the period.

You can now see your estimated opening and closing cash flow statements for Year B. Let’s break it down in an example. 

You ended Year A with an available cash flow balance of $250,000. Your Year B estimated revenue is 1,000,000. The estimated expenses for Year B are $800,000. Your estimated available cash flow is $200,000, and your closing cash balance is $450,000 ($250,000 from Year A and the additional $200,000 from Year B). 

Now you have your starting point or opening balance and your estimate. 

Estimating cash flow is not an exact science, especially when you are planning out an entire year. When you are looking at it yearly, that is more of a budget in our minds than a cash flow tool, but you need your budget to know where you are going to start from. Remember that these are your best guesses based on the data at hand. Stay flexible and regularly check in on your cash flow estimates as part of your cash flow management practices. 

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Consistently checking in on cash flow is something you want to do on a weekly basis, at a minimum, if not even daily. Again – we recommend you use a 13-week cash flow tool to manage the cash of the business. You can check out of free tool here: https://mobilizationfunding.com/cashflow/ For more information and helpful tips, fill free to check out our Big Book of Cash Flow here: https://mobilizationfunding.com/the-big-book-of-cash-flow/ and unlock your company’s potential for growth!