The cash coaster: smoothing out cash flow ups and downs.

• Author: Mecham, Jesse
• Position: Money Talk

Irecently tricked my six-year old into X going on Space Mountain. Porter had never been on a roller coaster before. His questions were nonstop and sincere.

"Has anyone ever fallen out? Are there seat belts? What if they break?"

We climbed in, strapped ourselves down, and took off. Once the ride was over, we looked at a photo snapped of our car during a particularly precarious portion of the ride. You could barely see my sons head above the car. His eyes spoke volumes--he was terrified.

I asked him what he thought of the experience, and his response surprised me. "That was my favorite ride, Dad."

The picture of him during the ride and his personal response right after were in direct contradiction to one another. As so often happens, my mind wandered to budgeting.

Our financial roller coaster is full of ups and downs, dark tunnels and hard turns that make you feel like you'll be thrown from your seat. This is especially true for businesses. You'll have moments of reprieve, and then a huge dip where you're blindsided by some unforeseen expense. You weather the cash flow storm, but if I were to ask how things are going, you'd tell me, "Just fine." You tend to optimistically block out the rough spots of the past and plow forward. After all, you have a company to run.

Cost Analysis

Your objective should be to manage your expenses proactively Look back through your P & L for the last 12 months and take note of any large, infrequent costs. They're what create the "downs" in your roller coaster, or a cash flow crisis. For example, consider the annual property taxes on your warehouse. Every time the bill comes, you scramble, cut back or perhaps throw a little on the company card.

Instead, make every expense a foreseeable, monthly expense. Just divide by 12 and pretend your property taxes are due each month. If they equal $12,000, then you'll set aside $1,000 each month and "pay" your property taxes throughout the entire year. This works for everything: Christmas bonuses, company retreats, new office equipment, etc.

Thinking ahead and pro-actively setting the money aside prevents huge spikes in spending. Leveling out your expenses by spreading them over the entire year makes them easier to handle.

Plan for the Dips

This method of treating future bills as "now" expenses works great when dealing with foreseeable obligations. But what about the unforeseen? Crises can be avoided by maintaining an emergency fund of three to six months' expenses (as we're...