Cash Flow Management
Using a Simple Cash Flow Projection to Avoid a Business Meltdown
A cash crisis can kill a business. But using a simple cash flow projection can help you see trouble far enough in advance to avert disaster.
This scenario occurs almost daily to a small business somewhere.
The business is profitable and growing, customers are lining up at the door, and the future looks incredibly bright. The company has a wealth of receivables, but adding staff and expanding facilities and ramping up inventory to meet demand takes a toll on available cash.
To stretch cash, payments to suppliers are delayed causing deliveries of materials to be held up. Customer deliveries become late leading to customer defections and slower invoice payments. Sales start declining. Cash becomes tighter.
Now in dire straights, the company can’t qualify for a loan. A payroll is missed. Employees start leaving. Suddenly what was once a booming business becomes a going out of business sale.
Most of the time, this scenario can be avoided using a simple cash flow projection as an aid to smart financial planning.
You don’t have to be an accountant to create a cash flow projection. If you can balance a checkbook, you can project cash flow.
In fact, your cash flow projection should resemble your check register, only with your checks and deposits written down one to three months in advance of when you’ll actually make them.
A simple spreadsheet is a great tool for compiling your projection. Build it just as you would a check register – with separate columns for date, description, deposit, withdrawal, and balance.
Start with today’s date and enter your total cash balance in all your checking, savings, and other liquid accounts. Make a list of all your regular monthly bills (and projected payroll, too) for the next two or three months and enter them in your spreadsheet according to the date they need to be paid.
Next, go through your payables file to find non-recurring expenses that have to be paid in the next 60 to 90 days, and enter those in date order by when you need to mail the check. Also factor in any new purchases you expect to make that will have to be paid for in the near future.
When you have all your future expenses entered, start entering your future deposits. Review all your receivables and forecast when you will receive payment and be able to deposit the money.
If you have a large number of customers who owe small amounts, you can simply estimate how much you can realistically expect to receive each week over the coming months based on past experience.
Also make a reasonable estimate of future sales that will be collected within your projection’s time frame.
When projecting receipts, it’s critical to be pessimistic. Falsely painting a rosy picture will simply blind you to a crisis you should have predicted. No one ever lost a business by preparing for a cash flow crunch that never materialized.
When all the cash outflows and inflows are tabulated in date order, the balance column tells you when trouble may occur.
You might find your projection telling you that in six weeks, you’ll be $20,000 short of meeting your obligations, but back in the black ten days later. Armed with that knowledge you can take simple steps to avoid business embarrassment and a cascade leading to failure.
For example, look for payments that you can reasonably delay until you’re back in the black without alienating suppliers. Is there a large receivable that you might be able to coax a customer into paying earlier than you forecast, perhaps by offering a small discount?
Or perhaps now is the best time to begin talking with your bank about a business line of credit (or increasing your line) before your financials start taking a tumble.
The magic of a cash flow projection is keeping it up to date. Revise it at least every two weeks to be sure to identify any changes in assumptions that could unexpectedly wreck your business.
As in all things, knowledge is power. A simple cash flow projection can be a terrific crystal ball letting you know what you need to keep your business thriving while there’s still time to get it done before the storm.
Related Articles:
Managing Project Profitability
Recognizing Earnings Accurately
