Eighty-seven employees depend on Jon McClure to cover their checks every payday. The chemical companies who supply him with feedstock expect him to pay their invoices in a timely manner. Unless ISO Polyfilms generates sufficient cash, the Gray Court, S.C., company he founded a decade ago will manufacture only disappointment. "Cash is king, always," McClure says.

Many small business owners make the mistake of assuming that the amount of money they have in the bank is all they need to know about managing cash flow, says Frederick, Md., business consultant Andrew Marcou. "But that's just a snapshot of how they've managed their cash and operations," Marcou says.

The problem with focusing on your bank balance is that the cash in your checking account may be necessary to pay for expenses already incurred. If you count on it to fund future operations, you may run short and need outside financing or risk alienating employees, vendors and other creditors.

The cash-flow statement is one important tool for understanding cash flow. This statement includes information on your sources of cash, such as operations or proceeds from a loan, and what you are using the cash for, such as purchasing equipment. Non-cash expenses such as depreciation and changes in inventory, accounts receivable and accounts payable are also considered. The bottom line of the cash-flow statement reveals the change in your cash balance for the year, quarter or month, and altogether it provides important insight into where you got and spent your cash.

To gain better understanding of your business's cash flow, Marcou advises clients to calculate gross profits, or sales minus costs, on a cash accounting basis as well as on an accrual basis, then compare the two. Cash accounting, which records revenue and expenses as cash comes in or goes out, is the accounting method most small businesses use. Accrual accounting, which seeks to match income and outgo by recording expenses and income when they are incurred or earned, is more often used by big companies.

All business owners need both to properly manage cash flow, Marcou says. "Companies that are well-managed will have a very close correlation between the two," he says. "Companies have cash-flow problems will have a significant difference."

That information doesn't necessarily tell you whether you'll be able to make payroll next month. Budgeting for future cash flow requires careful examination of your specific business and your best forecasts.

"We do a very detailed budget that breaks down where we believe the business is going to come from, the margin on that business and the dollars of gross profit," McClure says. The revenue portion of the forecasts identifies specific new customers that are likely to come on board, while the costs side includes details such as the variations in cost of shipping to different customers' locations. "Our budget is so detailed that it goes down to the lowest salary, when we think each employee is going to get a raise and how much that raise is going to be," McClure says.

The information from analyzing cash flow is used in several key tasks. Among them is communicating to lenders and investors how the company is doing. McClure is careful to keep lenders thoroughly up-to-date on ISO Polyfilms' cash situation "If the numbers are always late and there are surprises, your bankers are probably not going to support you," he warns.

Cash analysis also helps you identify ways to better manage cash. For instance, you may have purchased too much inventory, tying up excessive cash. Or you may not be collecting receivables as quickly as you might, also decreasing your available cash.

Once you have identified your cash bottlenecks, changing your business practices can ease them. For instance, you can work to move excess inventory, perhaps by offering discounts. Or you can try to reduce accounts receivable by tightening up on credit standards for customers.

Getting the most out of your cash can require a broad spectrum of moves, from modifying the way you cut checks to changing your checking account to an interest-bearing account. However, before you do anything to improve cash, work to analyze where it's coming from where it's going and why.

"The first thing to do is understand it," Marcou says. "Once they understand it, they can focus their energies and efforts to fix any problems that they might have."