- Posted by Tom Shay on January 7, 2010
Making a profit or just surviving through the challenges of the economy; which is more important? It is a difficult question to answer, but even more difficult if you do not know where to find the answer.
Components of the answer can be found on the profit and loss statement while other necessary components are to be found on the balance sheet. The answers you are looking for are on neither. Perhaps the biggest questions you are asking as you are looking into 2010 are, “How much cash will it take to keep my business going each month?” with the second question being, “How much inventory will it take to produce the sales I anticipate?” or “How much inventory can I afford?”
Profit is not cash on hand. Look at the profit and loss statement at the end of the month as well as take a look at the balance in the checking account. There is no relationship between the two numbers. This is because all of your profit could be sitting in inventory that is necessary to have on hand for the next month. It could be your profit is in inventory that is sitting there in your warehouse producing no sales at all.
While profit is important, it is not the key factor in answering the questions about cash and inventory. The new components of sound financial management that should be considered are the anticipated cash on hand for each of the 12 months of 2010 and the amount of inventory at cost that you need, and can afford, to product the sales you are anticipating.
The document that will produce the answers to these two questions is referred to as a projectionary cashflow chart. Each and every business within this industry should have this document that they have created and understand. The document should also be updated each month so that it is always a 12 month projectionary cashflow chart. As the balance sheet and profit and loss statement are created each month, the numbers from these two documents should be compared to what is on the projectionary cashflow chart.
This monthly review is done so that you can see where you have missed your expectation and take the opportunity to adjust future projections to improve the accuracy of the numbers.
The projectionary cashflow chart is going to tell you if there will be enough cash on hand each month to produce the sales you are anticipating. The same is true as the chart will tell you how much inventory will need to be on hand at the end of each month to produce the following month’s sales.
This information is going to tell you about the opportunities before you and if you can afford to take the opportunity. For some businesses it will tell them how to avoid a problem, and for some businesses it will tell the owner if they should simply close the business before they lose any more money.
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