Impress lenders with cash-flow sense. (Business Financing).

Nothing impresses a lender or investor more than business owners with a thorough grasp of their company's cash flow. Understanding cash flow leads to better business decisions.

But how does one project and manage cash flow? The answer is not complicated.

First, let us define the terms. Cash flow is the amount and consistency of funds flowing through a business during a given period. A cash-flow system, or budget, is a means by which monthly cash inflows and outflows are forecasted and controlled to maintain a positive balance.

A cash-flow budget provides a detailed view of the operation and an early warning system to avoid cash shortfalls. It signals bankers, investors and key suppliers that the owner/manager is in control of the business and it allows everyone to measure how well a business is meeting its growth and expense-control objectives by comparing forecasted sales, profits and expenses with actual performance.

Notwithstanding outside assistance, after a few months owners/managers should be able to prepare their own cash-flow systems. One practical way to use an accountant's expertise is to develop a cash-flow budget and then have an accountant look it over and suggest refinements.

Here are some basic steps to preparing a cash-flow budget:

* List business objectives for a minimum of one year, but preferably up to three years. Include sales projections, profits, plant/equipment expenses, personnel requirements, manufacturing costs, overheads and a forecast of how the firm's products/services will perform in comparison to competition.

* Prepare detailed assumptions related to aspects of the business that influence cash flow. Examples include sales projections, profit, labour and material costs, fixed monthly costs and planned capital expenditures.

* Project cash flow by converting sales forecasts into monthly cash receipts and entering expected monthly disbursements. Sales forecasts are converted to receipts on the assumption that various amounts will be received at different times, for instance, one third in 30 days, one third in 60 days and the balance in 120 days.

To establish monthly cash flow, subtract the total of all payables from receipts to determine the cash surplus or deficit for the month. Matching the expected cash inflow with outflow produces a positive or negative cash position.

Now you can make adjustments. It might be necessary to reduce or eliminate, a deficit by extending payables with the consent of a supplier, by tightening up on receivables or by making the necessary financial arrangements. With a surplus, it might be wise to pay down debt or finance expansion.

A cash-flow budget summarizes the impact of all activities on total operations. It shows how much money is required at a given time to finance activities and gives a warning of deviations from the plan so that management is able to respond.

By the time a second cash-flow budget has been prepared, I predict it will provide a management road map, without which management would be lost.

Normand Meunier is director, Northern Ontario RoyNat Capital's Sudbury Office