Cash Out
Cash out = any and all money that flows out of your business in a given month.
Once you’ve mapped out your inbound money, it’s time to get a handle on what’s flowing out of your coffers.
Take into consideration all of your expenses on a monthly basis. Include things like employee wages and benefits; supplies; taxes on sales, income and property; interest payments on loans; insurance; rent; cost of goods sold; payments for shiatsu massage (line item, “stress relief”), and any other expense the company will be obligated to pay out in a given month.
Now for a question: When mapping out cash inflows and outflows, which of the two do you think entrepreneurs most commonly over estimate? Which do they most commonly underestimate? If you don’t know the answer by experience, the you probably know it intuitively. Avoid the trap of creating rosy cash in-cash out assumptions. Otherwise, your planning for the future will be based on high-risk assumptions.
Planning the future
What should start becoming clear is a sense of the comparative inflow of cash versus the outflow of cash. You’ll begin to get a picture of fluctuations in money left in your bank account by drilling down to this level of detail. And the chances of a big, scary surprise will be minimized.
You’ll also probably notice some trends. Do expenses grow as sales grow? Or, are you seeing that your revenue is growing faster in proportion to your expenses. If so, this is a promising sign that your business “scales”—that the profit margin, the difference between what you sell for and what it costs to sell, increases as revenue increases.
On the other hand, you may notice that the profit margin gets thinner over time. This can result from having to add infrastructure like people, expensive technology, commissions, increased rent for expanded facilities, outsourced services, etc. If this is the case, it’s not the end of the day – you just need to be aware of the phenomenon and do whatever you can to counteract it. If your cash flow forecast shows your margins getting too tight over time, you may want to rethink your overall strategy for the business. Do you really want to give all your energy to a business that performs that way?