Creating and analyzing cash-flow projections regularly helps keep unwanted surprises at bay.
"Cash is king" has been a guiding principle of the business world for generations, but does it still ring true in today’s technology-driven global economy? You bet, say financial experts who believe that cash not only rules the business world, it is an essential tool in assessing the strength of your company.
"A comprehensive cash forecast is a critical management tool," says Leonard Eppel, managing director and CEO of Financial Resource Associates, a crisis-management consulting firm that helps distressed companies regain their footing. "Closely watching cash provides an early awareness of any significant change either internal or external. The cash forecast also presents a consolidated snapshot of every significant source and use of funds while providing key early indicators of the strategic alignment of all expenditures."
Buffer Zone for Mistakes
"I'm big on cash—rolling 13- or 26-week forecasts that you come back to and say 'how good was my projection,' and if it wasn't, 'why.' Are customers paying slower, for example?" says Gary W. Patterson, owner of financial-analysis and -planning consulting firm FiscalDoctor Inc. "The key thing is if you have cash, you’ll live. The 13- and 26-week cash flow projections are important because if you project it that far out and mess something up, you've got time to fix it. You also have to project out past your comfort zone to try to see what's really happening to you."
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Both Eppel and Patterson emphasize that even healthy, growing businesses need to regularly create and analyze cash-flow forecasts to keep themselves out of potentially dangerous situations. "Long before proceeds from a sale are collected, a company needs to invest cash in inventory, payroll and accounts receivable," says Eppel. "There's an awful lot of companies that die because business is too good," says Patterson. "You may get a $1 million contract, for example, but you're going to spend a lot of money before you get it back. If you're not prepared, it could kill you."
Memorize your burn rate
—the amount needed per month
to fund your operations—and
add a contingency line-item
in your budget.
Prepped for Growth
NFIB member Darryl Lyons, CEO of financial-planning firm PAX Financial Group, says a good way to begin creating useful cash-flow projections is to establish an independent advisory council consisting of fellow business owners who can give you honest feedback on your budget. "Revenue projections should have a best case, base case and worst case," says Lyons. "Memorize your burn rate—the amount needed per month to fund your operations—and add a contingency line-item in your budget. Complete quarterly reviews of the budget versus actual expenses."
"The forecast should be prepared by someone within the accounting department with as much involvement from others as the situation warrants," advises Eppel. "As an internal management report, the cash forecast can be completely customizable as to the presentation of income and expense components. But it is important that there be adequate detail, or you could miss observing key details that are taking place."
While there certainly can be negative consequences of not adequately monitoring cash flow, Patterson believes effective cash-flow tracking can have a big upside. "If you’re rock solid on cash, then you'll feel confident enough to pounce on a great opportunity," he says. "You can take bigger risks if you’re more comfortable about where your company is on the pluses and minuses, particularly how accurate your balance sheet is."