Predicting
and managing cash can be one of the most difficult things small businesses
do.
If
your company is growing, it’s extremely important; we all have seen many growing
companies run out of cash due to growing accounts receivable and inventory. And if your company is not making money, it’s obviously
extremely important watching every dollar.
We need to make payroll and keep the business operating.
I
like to put in place two process tools that really help any business predict
and manage their cash. The first tool
which is essential for most small businesses is to put in place the 13 Week
Cash Flow worksheet. This should be
updated, reviewed and revised every week.
The
worksheet is simple – it has weekly forecasts for cash receipts and cash
disbursements. The trick twofold:
·
Being
able to predict the timing cash receipts
·
Having
place holders for planned disbursements
Predicting
Cash Receipts
In
smaller companies, detail expected payments for all outstanding invoices. In the most companies, however, due to the size
of receivable aging, assumptions must be made based on current expected cash conversion. Accounts receivable turnover is measured on a
weekly basis and strategies are developed and implemented to make improvements. Small improvements in accounts receivable
turnover as a dramatic effect on cash flow. (For example, a $10,000,000 parts
distributor with $1,500,000 in accounts receivable, decreasing accounts receivable
on average of days 5 days, increases cash approximately $139,000.)
Disbursements
The
worksheet needs to contain placeholders for everything. Bi-weekly payroll, benefits, rent, debt
payments, operating and admin expenses, A/P, inventory purchases, cap ex, debt
and other payments. No surprises.
Each
week, review the prior week’s worksheet with actual receipts and disbursements,
and recast the next 13 weeks.
The
process is straight forward and over time you get better at your
predictions. Forecasting cash flow in
your business makes life much better.
Less stress, more predictability, ability to make commitments, etc.
The
2nd tool is an Operating Plan forecasting the basic financial
statements: balance sheet, income statement and statement of cash flow. The Operating Plan uses some key business
drivers as its base.
I’ll
discuss this in more detail later.
As always – Think Profit
and Think Cash Flow!
/jon
