Although a business may appear to be profitable, it can incur serious problems and even have to cease operations if the company grows beyond its capacity. The Inter-American Investment Corporation (IIC) offers five recommendations for creating a positive cash flow plan for small and medium enterprises (SMEs). 

1. Create monthly projections (curb your optimism): When projecting sales for cash flow purposes, don't be excessively optimistic. A best practice would be to use worst-case-scenario estimated sales figures or historical monthly averages. Any sales figure used for cash flow planning should be realistic and readily achievable.

2. Remember receivables: not every sale is created equal when it comes to cash. Cash and credit sales are available for ongoing operations immediately. However, sales with terms can take 30, 60, or even 180 days or more to turn into usable funds. This factor is key when generating monthly cash flow projections. Also, remember the potential impact on cash flow before extending terms to new customers.

3. Consolidate predictables: Every business has a core monthly cash burn that includes things like rent, payroll, and telephone service that are consistent and predictable. Consolidate these numbers into one operating expense figure. This will help businessmen easily identify the amount of money that is necessary each month to cover operating costs. If the company does not have the capacity to cover them, it runs the risk of running into financing problems and to whether it will be able to stay in business over the long term.

4. Adjust for growth: It’s critically important to account for the capital required to grow. Many successful businesses fail by not having sufficient cash to fund their growth. New sales often require new expenditures for equipment, employees, and marketing. In most cases, the expenses come before the sale which requires that the cash is available in advance.

5. Plan for the unforeseen: Unforeseen scenarios need to be factored into any cash flow forecast to ensure that, when opportunity arises, the business is in a position to capitalize. A company that does not have a contingency plan in the event of an emergency does not have the same capacity to respond as a company that has, for example, a cash fund or emergency stock.

Whether the plan is status quo or growth, any cash flow forecast must include a contingency plan or “slush fund” to account for potential new opportunities or challenges.

The IICrecommends keeping a running total of monthly cash flow, minus operating expenses. The lowest net total amount is the extra cash that is required to run the business or achieve a sales growth goal.

If this amount is negative, it must be available to the company in the form of credit or existing capital so that the company does not become insolvent. Once planning cash flow has been mastered, cash will still be a relevant factor but it will cease to be the most essential.