Managing cash effectively is an important challenge for creative firms, particularly small companies that do not have a lot of reserves. This three-part article will help you get a handle on this vital business issue.

“Cash” includes not just currency, but also checks, money orders, bank transfers, and the like. The term “cash flow” refers to the overall movement of money into and out of your business over a given span of time. If a company has positive cash flow, money will be available for such things as expanding operations or making distributions to the owners. However, if a company has negative cash flow, it may have to borrow money to continue operating.

There are three standard tools used by well-managed businesses to analyze their cash activity:

• A short-term cash flow projection
• A long-term cash flow projection
• A cash flow statement

Let's discuss each one of these individually.

Short-term cash flow projection
This is a forecast of the cash that you anticipate receiving and disbursing within the next 60 days. It's usually organized into four columns, each representing a 15-day span. In order to prepare the projection, you must first print two small reports from your financial system: an updated accounts receivable aging and an updated accounts payable aging. An accounts receivable aging report is a list of unpaid client invoices, usually grouped by name. On the left, each invoice is listed in order of date issued. On the right, there are columns to identify how long you've been waiting for payment. You can set these preferences in your financial software, for example: “current" (less than 15 days), “15 to 30,” “30 to 45,” and “45 or more.” Unless a client has informed you to the contrary, your expectation is that the oldest invoices will be paid first. Your accounts payable information should be aged in the same way. Typically, you'll pay the oldest vendor invoices first, although priorities sometimes shift. Don't forget that you may have a few additional obligations that do not go through the accounts payable system, such as monthly rent, payroll, and loan payments.

To start your short-term cash flow projection, enter your beginning cash balance at the top of the first column. This should include the amount in your checking account plus cash reserves such as savings accounts or money market accounts.

Now, place the individual amounts into the appropriate columns on your short-term cash flow projection. In each 15-day period, you'll see the beginning balance, expected cash in, planned cash out, the net change, and the ending balance that will result. The ending balance at the bottom of the first column becomes the starting balance at the top of the next, and so on.

This short-term format is very conservative. It only shows actual amounts that are already on your books. In contrast to the long-term projection that we'll discuss in the next article, it does not factor in any potential or speculative future activity. When you read this report, what can you do if you see that your cash balance is going negative very soon? We'll discuss that next time!

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