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Cash flows essential for a good business
By Nilooka Dissanayake
In evaluating a business idea, we need to look at several factors. Profit is just one of them. In fact, while profits are necessary for a business to go forward, to flourish and grow, it is more important to look at your cash flow patterns. After all, what is the point of making a profit some day if you cannot meet your obligations as they fall due?

Nihal Fonseka, CEO of the DFCC Bank advises small and medium business operators to never touch a project that has insufficient cash flows. "Profits alone are not enough" Fonseka was quoted as saying in the Athwela Business Journal, "Ensure that you have sufficient cash flows."

More and more business transactions are undertaken on terms other than outright cash payment. In fact, cash payments are becoming less and less the world over. So, that means, for business people everywhere, knowing their own cash flows is also becoming more important.

Most of you who are reading this will not be accounting professionals. And if you are thinking of a small business of your own, you will most likely not be able to afford the services of accounting professionals at the initial stages of your business idea development. Does it mean you dispense with making cash flows or give up on business? Of course not. You are going to learn the basics of cash flow planning on your own. You do not need to be a rocket scientist for that, trust me. You do not need to be accounting oriented either. All we ask of you is common sense.

So, how do we start cash flow planning? Once again we will use Athwelage Sarath and his dream business as an example. Sarath wishes to provide vegetables wholesale to large retailers and others who purchase vegetables in bulk, like hotels and hospitals. He is yet to decide exactly who will end up being his customers. He is still looking around and talking to prospective buyers to figure out volumes and profitability.

In the meanwhile he wishes to do some cashflow calculations - just for practice. He is not confident about his abilities on this front and is all at sea. But is willing to spend time to learn.

Just as Sarath's gut feelings tell him he can make profits in the vegetable wholesale business, Sarath also knows that cash flows are important. They can, or the lack of them can put him in trouble. In his business, he has to pay the farmers in cash for the vegetables he purchases. If not, they can stop their supplies or go elsewhere. On the other hand, all the large buyers he has spoken to so far require a credit period. Sarath knows that, unlike in some sectors, it is unlikely that he can obtain advances from clients. That means cash flows and how he manages them will be of utmost importance.

So he decides to do a cashflow projection for the first three months of his business, assuming that all sales will be on credit and all the purchases on cash basis.
This is the table that he plans to fill.

He has seen a similar form in a book and wants to adapt it to his business. He finds A, B and C quite obvious. C is the difference between the inflows and outflows. The shortage is shown in brackets because outflows are shown as negatives and hence a net outflow will result in a negative figure. D, he figures out is supposed to be the cash he starts out with at the beginning of the month. The net result of C and D then is the cash he will be left with.

Sarath is still not sure of his sales volumes. But, every time he speaks to prospective customers, he is calculating their potential monthly requirements. All he knows for now is that he will have quite a large negative outflow in the first month. How is he going to get the vehicle he needs? If he spends his money to purchase the vehicle, he will not have enough money to last him for the rest of the month.

While Sarath ponders over his cashflows, why not do the same yourself for your dream business? If, like Sarath you are not sure of your potential sales volumes, why not put in a bit of hard work and thinking to figure this out? Imagine all the potential ways you can get cash into the business and all the possible outflows you will need to meet.

If there is a shortage, and it is most likely it would, imagine how you can bridge the gap. Next week, we will compare Sarath's cashflow projections in detail. We look forward to answering the issues you face in your business planning process. You can reach us on btimes@wijeya.lk or on 074-304100.
The writer is the Managing Editor of Athwela Vyaparika Sangarawa (Athwela Business Journal).

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