Jim Anderson, B2B CFO®
Providing CFO services in Spring, TX and surrounding areas

Creating effective cash flow projections is important for every business.

The frequency depends on the stage of your company: stable and steady, monthly is fine; high growth, crisis, or contracting, weekly is imperative.

The layout in its simplest form is: Beginning Cash Balance + Cash Receipts (In) – Cash Disbursements (Out) = Ending Cash Balance.

To have a valuable tool, follow these five steps:

Reconcile Bank Account

It is important to start with a reconciled checkbook balance. Caution do not just check on line and start with the amount stated in the bank account. There may be outstanding checks and other charges.

Reconciling the company’s bank account monthly is critical for many reasons: control, accuracy, impact on decisions, and affects the cash flow forecast.

Create a profit and loss forecast

Forecast revenue, variable costs (costs incurred only if there is a sale) and fixed costs (costs incurred whether you have a sale or not) for the next six months.

Fixed costs include: indirect costs (field supervision, vehicles, insurance); sales, general and administrative costs (office payroll, rent, utilities, marketing, benefits, and taxes).

Take the previous six months of operating results to validate the projected monthly operating costs.

Determine timing

The next step is to determine the actual timing of sales, variable and fixed costs on the cash forecast.

A sales made, does not mean cash received. Determine the timing of when you will be paid for the product or service sold.

If 30 day terms are offered, project receiving the cash in the month after the sale is made. Example: sale made in October; cash received in November.

The main variable costs are direct labor and materials. Labor may be paid weekly or bi-weekly; while you may have 30 – 45 day payment terms with major suppliers and vendors. Fixed costs are usually paid out in the current month.

Factor these timeframes into the forecast.

Identify other cash items

Capital expenditures, prepaid expenses (insurance, annual maintenance agreements), loan payments, taxes and other balance sheet items must be identified and factored into the analysis.

Example: Based on age of equipment and forecasted revenue; a new piece of equipment will be purchased. The cash out will not be reflected in the expenses of the company, but must be accounted for on the cash flow forecast.

Reality check

After you have put all the pieces together; take a step back and ask a few simple questions: Do these projections make sense? Am I comfortable with my sales forecast? Do the actions within the company support the expected results? If changes are needed to achieve these results, have they been made?

Do you need assistance in creating a cash forecast? Call us for a free consultation to discuss how we may assist you.

“Cash is the life blood of any business”; and “Cash is king!” are two well known statements for business owners stressing the importance of cash.

If cash is essential to all business, why do companies (or families for that matter) struggle with cash flow? Simply stated: They spend more than they earn.

You may be thinking, “WOW, that’s absolutely brilliant!” or more likely, “life just isn’t that simple”.
The problem may be straightforward, but how about solutions? Let’s look at five.

Budget

A budget is a plan of a company’s sales and expenses for a given period of time. Creating an annual budget allows leaders to know results needed to meet expenses. This process may lead to making tough decisions.

Word of encouragement: Be realistic with assumptions; monitor and compare results regularly; and be decisive with changes.

Sales Process

To better measure results and monitor performance, a well defined sales process is required. Over the past several years, sales became more ‘order taking’ than creating value for customers and earning their business. A complete sales and marketing strategy is essential in this market.

Do you have a sales process or are you ‘winging it’? What tools are being used by the team? Who are you learning from? Are you attending sales training? Are you as the owner of your business ‘serving your existing customer’ and seeking out new customers?

Cost Control

Controlling the outflow or expenditures is always important and at times, critical. An effective purchase order system is important to controlling costs before they are incurred. Be informed and decisive.

Credit Policy and Process
An effective credit policy establishes boundaries for both the company and its customers. A policy may include: credit application; reference checks with other vendors and banks; credit limits; defined credit terms; and a clearly outlined process.

Knowing your customer is important, especially before they owe you money.

Collection Process

A well defined and followed collection process will improve customer timely payments by 25%. A clear and consistent method of communicating with customers is critical.

Here are three ideas: 1) invoice timely; 2) understand how the customers want the invoices to be formatted, where sent and to whom; 3) call three days after invoice sent to ensure customer is satisfied with work completed or service provided, identify any issues with invoice, confirm payment will be made within terms, and thank them for the business.

Be intentional with how you manage your cash and it will pay dividends!