How do cash flows and?

Answer 1

The point of a cash flow is to ensure that a business can meet its obligations. Many people confuse a cash flow projection with a budget: they are not the same thing.

The budget tells you what you expect to spend over the course of the budget period, and this may be split into months or even weeks. But the figures are not really accurate, since most places will blow their budget very quickly - you might, for example, budget to spend $1200 for a year on, say, stationery, and split this into 12 equal lumps - $100 per month. In fact, you are likely to find that you spend $500 in the first month, $300 in the second month, and then nothing until the eight month, when you spend a further $500.

With a cash flow projection, you attempt to state WHENyou are going to spend the money. So, that you get less of a 'surprise' when you spend (as described above) $500 in the first month. So the whole effort is in ensuring that you really know when you will have the expense (or income).

The advantage of this is that, if your actual spend is different from your projected spend, you can look for reasons why it happened - that first month in stationery may have been because you needed to replace (or buy) all the letterhead, business cards and so on. The thing is, when you expect to spend (or make) a certain amount of money, you can know early enough about making arrangements or changes to your business.

Take a look at our "Eat The Rhino" e-book (http://www/eattherhino/com to see how we suggest putting a cash flow into place for a start-up business