LearnChecking the cashflow


writes on November 29, 2006

Today I checked our bank balance, updated our cash flow Excel sheet and had a financial meeting with Gill (my wife and the other Director of Carson Systems).

Always being pessimistic

One thing that I continually have to remind myself is that cash flow projections should always be pessimistic. There’s just no use in saying “Hot damn, we’re going to be filthy rich if we exceed our sales goals!”. In can be exciting, but it’s useless.

Here’s my tip for cashflow projections: Cut your sales by 1/2 and then a little bit more.

If you’re still comfortably in the black 3-4 months in the future, then you’re good to go. Note: This advice applies to small businesses. If your company is bigger, you’ll need to look much further into the future. Also, if your company is fairly new, you might need to check your cash flow monthly or weekly. (We did, in the beginning.)

Don’t forget the tax man

The easiest mistake to make, is to look at your bank balance and forget that a part of it belongs to the Tax Man. If you don’t account for this you could be out of business before you know what hit you.

Plan for inflation, bonuses and pay increases

When planning your 3-year cash flow projection, don’t forget that you need to give your employees pay rises and bonuses. You also need to account for 3% inflation.

Formula errors are hard to spot

It’s extremely important to double check your spreadsheet formulas. Then check them again. Go through each Sum and Total and quickly check it’s correct. A great way to do this is ask your accountant to have a quick check over the spreadsheet – they’re great at spotting these kind of things.

Share the love

If you have good cash flow planning tips, or example spreadsheets, feel free to share below.


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0 Responses to “Checking the cashflow”

  1. People should constantly check their cash flow to avoid any problems. Maintaining your business is hard, especially if you don’t know how to properly manage your cash flow. If you’re really having a hard time, you can always ask for some advices, it can help you in many ways.

  2. A few tips for a solo web/marketing/designy person working for themselves…

    I think the trick is to know exactly what is coming in and going out of your business on a daily basis. I know it sounds a bit over the top, but if you see a slightly dodgy balance every morning you are more likely to make that extra effort during the day. Then if you are a web designer/marketing person etc calculate how much money you made that day. Write it down and leave the office/desk/settee where you were working and feel proud of what you achieved that day. You’ll soon realise unproductive days make you feel crap, and productive days really give you a boost.

    Also to help with cashflow always make sure your terms for payment are 14 days. The day before they are due call the people who will pay you and just politely ask whether payment is scheduled in for the correct date. Build a relationship with the payer too.. it always helps. The 14 days thing is great because you can do work up until around the 14th of the month and get paid that same month.. sometimes this is a godsend.

    If you are VAT reg then make sure you don’t assume your bank balance is correct.. you’ll need to pay the VAT man! Always have a rolling VAT figure either on a whiteboard or written down somewhere. The same goes with Corporation tax if you are Ltd or Income Tax if you are self employed…

    The best way to stay on top is a big white board. Stick one up in your office. Have 3 initial sections: QUOTED, CONFIRMED AND IN PROGRESS, INVOICED. Put a liitle title of each job and the value and try to get them to jump from one column to the other as quickly as possible.. if they keep moving you are making money! (maybe). Also on the board you should have your bank balance, VAT rolling total target bank balance for a date in the future (IE. Xmas) and a list of all the outstanding invoices that are owed to you. This might seem a lot of work, but I swear by it and it really helps you get on top of things. Obviously this is only suitable for certain people/businesses etc but it works for me.

    A quick pic of my whiteboad is here: http://www.flickr.com/photos/jakeandjemela/310199509/
    I didnt say that it had to look good 😉

    You also get to use a whiteboard… which is um.. strangely cool..?


  3. Ryan Carson on November 30, 2006 at 11:17 am said:

    Thanks Matt – quality advice!

  4. “Don’t forget the tax man”

    If you can, put “his” money aside, and put it in something that earns more then your savings account. It feels great to know that the quarterly payments are saved and earning something extra…

  5. I’ve been running a consulting & services company since around 1997, and here are some random cash flow related issues I’ve learned over that time.

    + For a services company, it seems that a typical prediction horizon is about six to nine months, after which you’ll see the curve quickly drop.

    + In theory, one should retrospectively review cash flow forecasts, to learn which type things affected them (in your company), with the objective of making more accurate predictions in the future. In practice, we hardly ever have time to do this.

    + It seems many companies are frequently in the situation where they have X in the bank, Y in accounts payable, and have Z in accounts receivable, where Z > Y > X (so you’re healthy). Unfortunately, you can still find yourself in negative cash territory if Z is delayed. Most banks will allow you to negotiate reasonable-interest credit accounts to handle such situations.

    + In Europe (at least in Germany), handling advanced VAT payments can get hairy when you have milestone based projects. For example, we got a large project kick-off payment in January, and the German tax authorities assumed we’d be getting that kind of income each month, and immediately increased our advanced quarterly VAT payment amount. This kind of thing can also be deadly if you don’t have a good accounting firm arguing your case toward the government.

    + Don’t forget that you’ll typically receive income in the month *after* a scheduled milestone payment (assuming you hit the milestone).

    + In our cashflow spreadsheet, we have three categories of entries — secure, likely, possible — and have switches to exlude “likely” and “possible”. This allows us to look at the three scenarios independently.

    Great thread, Ryan.

    — Matt

  6. Ryan Carson on November 30, 2006 at 7:19 am said:

    You CAN turn a profit and not be able to make payroll!

    Amen brother! 🙂

    Ted – Nice to have you stop by 🙂

  7. Ryan Carson on November 30, 2006 at 7:18 am said:

    Tip 2: Employees always cost a lot more than you initially think.

    Great point Peter. At the moment, we calculate their expenses as:

    Total expenses = Salary+(Salary*10%)+(Salary*12.8%)+(12*100)

    This is their salary, plus 10% pension contribution, plus 12.8% taxes, plus £100 per month for extras.

  8. I love it when people talk about cash flow. My biggest mistake as my business grew was paying too much attention to the income statement and not enough to the balance sheet and statement of cash flows. You CAN turn a profit and not be able to make payroll!

  9. Tip: Be very careful which VAT payment option you choose. For some, flat rate makes good sense, but for others (say, if most of your customers are based in the US) it could be a profit killer.

    Tip 2: Employees always cost a lot more than you initially think. Ideally, at least at the start, outsource or work with contractors / self employed people who will handle their own paperwork and taxes.

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