Income and expenses are not linear. Like stock charts, when they are plotted on a graph they rise and fall even though they may be following a general trend or rising or falling. In much the same way that humans breathe or the water in an estuary flows both in and out, a company’s cash flow behaves similarly.

Estuary [ es-choo-er-ee ]

noun, plural es·tu·ar·ies.

• that part of the mouth or lower course of a river in which the river's current meets the sea's tide.
• an arm or inlet of the sea at the lower end of a river.

As I mentioned in a previous blog, my office is in Germantown Maryland, not far from where the Potomac River flows through Washington DC. Not far past Washington D.C. is the Potomac estuary where the tidal waters from the Chesapeake Bay surge back into the river.

Your business operates like the estuary of the Potomac. Income is produced by the operations of the business and these funds flow into the back for the business to use for ongoing operations. Funds typically flow fairly consistently but not without some changes. For example, some businesses are not open on weekends and therefore no money flows into the business on Saturdays or Sundays. These peaks and valleys are normal. Conversely, the peaks and valleys caused by the use of funds can be a little more dramatic. For example, many businesses pay employees on the last day of the month, then incur several fixed expenses – like rent – on the first day of the month. These “surges” are usually much more dramatic than the inflows which are relatively steady month-to-month.

Fortunately, the trends for all these events do become predictable and just like we can predict the tides – and the corresponding effects to the flow and level of a river estuary – we can use historical data and trend plotting to predict the cash needs of the business in the future. 

The key to cash flow prediction is simple, but it’s not easy. First, income and expense events must be entered as they happen – preferably on the same day. Second, these accounts must be reconciled at the end of every month to verify their accuracy. Once we have a good set of numbers, the flow of money can be plotted much as a tide chart shows the flow of water in or out of the river.

Careful, meticulous planning will reveal the times when cash flow may be insufficient to cover the business's needs and armed with this, you can seek out alternative sources of cash to get you through the shortfall.

If you have any questions or need more clarity about cash flow and its effect on your business, Click below to chat with Parthiv.