I’ve been teaching financial management classes to small and midsize business for nearly 18 years, and one of the most important topics I teach is forecasting and managing company cash flow. In my classes, I joke with business owners that their cash flow forecast is the one business document they should keep under their pillow while they sleep at night. Too few business owners use regular cash flow forecasting to smooth out the normal ups and downs of business revenue and expenses, when in fact the forecast document should be one of the central financial tools for any business.
There are two kinds of cash flow forecasts. The first one is usually prepared for a bank or lending institution to demonstrate to it that its loan can be serviced during the first year of the loan’s term. The Small Business Administration distributes a good cash flow budget worksheet to use for this purpose.
The second kind of cash flow forecast is one that business owners use to manage their cash flow on a day-to-day basis. There are several templates for sale online, but the one I recommend is a free 13-week cash flow forecast Microsoft Excel template that I designed and is available on AllBusiness.com. It can be easily modified for nearly any business and comes with instructions.
If your business is experiencing erratic revenues, if your company is growing rapidly, if you experience seasonality, or if your business has hit rough economic times, the weekly method of managing your cash is very important.
When managing cash flow, you need to remember three fundamental principles:
- Cash equals spending power.
- It’s sometimes necessary to accelerate collection of receipts and decelerate payment to venders.
- Effective management of cash minimizes current assets and maximizes current liabilities.
From an operational point of view, keeping accounts receivable and inventory balances (current assets) low, and keeping trade payable (current liabilities) high is key.
The Texas Store, a two-location retail business located in Austin, Texas, began using 13-week cash flow forecasting and management a year and a half ago. The 21 year-old business never had to worry about it until the economy began slowing down in 2007. Revenue in 2007 was 20 percent less than in 2006 because shoppers were simply not buying. The owner, Richard Horn, realized he had to do something to better manage cash during the busy Christmas selling season.
Using the three cash management fundamentals listed above, Horn aggressively managed his inventory and payables, kept good communication with his suppliers, and updated his cash flow forecast every Friday. Each Monday morning he and his two managers held a conference call to plan which vendors they would pay that week and to make corrections in their forecast several weeks out. “If I didn’t have the cash flow forecast I wouldn’t have made it through the end of 2008,” Horn says. Even though 2009 sales are about even with 2008, Horn has been able to carefully manage his inventory and payables, and reduce expenses to the point that he has significant safety cash in the bank. Horn believes The Texas Store will be ending the year with significant cash in the bank — even in a break-even year.