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  • Rob Hall

Cash Flow Issues in Your Business? Try Cash-Flow Forecasting



“Cash is king” is a common refrain in business. Without cash, nothing else matters. Cash is like the hot air that keeps a balloon afloat, with expenses representing the cool air creating downward drag. Hitting the burners and offloading unneeded items can lead to great heights. A mismatch of the two can create drag that prevents the balloon from reaching peak height, while a major mismatch can result in a catastrophic crash and death.


According to Innovation, Science and Economic Development Canada statistics, thousands of businesses exit the Canadian marketplace every year. Further, Industry Canada attributes these exits to two main problems: poor financial planning and poor working capital management, both of which can hamstring a company.


This article will discuss strong cash flow management discipline through the creation of weekly cash–flow forecasts.


Working Capital and Cash–Flow Analysis Defined

Key financial components are working capital and cash–flow. Working capital is the present difference between current assets and current liabilities, while cash–flow is the amount of cash a company can generate over time. The difference between them is the difference between paying bills immediately and determining how things look in the future. Positive working capital provides the ability to cover near–term liabilities, while negative working capital means insufficient bank funds, receivables, and inventory to meet obligations. If working capital does not meet current needs, but future cash flow is positive, then, given enough time by creditors, a company can meet obligations; otherwise bankruptcy is a real possibility.


What is a Cash–Flow Forecast?

A cash–flow forecast analyzes the amount and timing of cash recipients and cash disbursements, providing insight into a company’s near–term liquidity. It is a role–up–the–sleeves line–by–line discussion, incorporating sales, marketing, production, and accounting perspectives to develop a granular view of the movement of money through a company.


What is the “Value” a Cash–Flow Forecast?

Disciplined detailed cash flow management helps

Avoid business failure by matching cash disbursement requirements with cash receipt timing. Besides ensuring that the bills can be paid, a positive bank balance helps eliminate both the short–sightedness of quick-survival jettison and the delaying of decisions. When in a cash–crunch, don’t cut evenly across the board; cut to enable short–term survival with a view to keeping what is strategic to long–term prosperity.


Create a true cash management view. It eliminates conjecture, speculation, and personal biases towards cash amounts and timing of receipts and disbursements. Granted, some assumptions are built into the revenue side of the model; however, a number written down in this context will be far more accurate than it would be in a sales only meeting. Remember, garbage–in and garbage–out. Rally the company staff around a common assessment of the state of the company finances, product delivery, and sales funnel conversion, as well as the next step towards recovery.


Reveal insights into customers’ paying and suppliers’ collection cadences. Accounts receivable and accounts payable timing insights can help determine which clients’ accounts receivable need to be managed tightly and which suppliers are lenient with their accounts receivable, allowing the company to extend payment duration.

Provide efficient cash management by surfacing excess cash to increase company value by enabling business imperatives, such as accelerating debt repayment or investing in a capital program.


Argument Against a Cash–Flow Forecast

Two common arguments against the TWCF exercise are that it is a lot of work and that it is unnecessary if business seems to be running okay. I firstly acknowledge that the TWCF takes work—gathering facts always does, but this work is easier when the pressure is less, and one isn’t worried about the imminent danger of running our of cash. Secondly, while I acknowledge the perceived reality of “OK,” I have seen companies that thought they were “OK” discover quickly, and too late, that they were not.

We recommend that companies undertake a TWCF exercise at least once to determine its value.

Recommended Cadence

The industry standard of duration for a TWCF analysis is thirteen weeks—the number of weeks in a quarter. Shorter periods, such as four weeks, don’t reveal many insights while longer periods diminish clarity and provide limited value. Thirteen weeks provides sense of rhythm and flow of cash movement.

Although a daily cadence may be needed in extreme cases, a weekly assessment provides a balance of effort and insights.


How to Produce a TWCF?

Setting Up the Tracking Sheet

Step one is to set up a TWCF spreadsheet (Excel is a perfect tool for this exercise). In the left to right columns, beginning in column C, set up two for each week beginning with Week 1 budget and actual; move to Week 2 budget and so on until you reach thirteen weeks.

Secondly, populate column A with the categorized items under the receipts section (title it “Cash Inflows”) and disbursements sections (title it “Cash Outflows”). Reserve column B for opening balances.

With your spreadsheet in place, populate the category items.


Populating the Spreadsheet

Start with the “Cash Receipts” section and insert a row for each of cash sales, on–account sales, proceeds from loans, investment by owners, and others. To do this, gather up the Accounts Receiving Aging reports and the sales forecast report for analysis and discussion.

The important parts of this exercise are to get a collaborative assessment of finance, sales, marketing, and operations departments, as well as to be realistic with forecasts. Being realistic means using history collections successes and the sales cycle duration and closure percentage as guidelines. Remember, optimism is important in business, but it should not fly in the face of facts.


Next, add cash outflow details by inserting rows for each disbursement item type, such as salaries, vehicle payments, government remittances, job materials, office expenses, professional fees, banking changes, and general and administrative expenses (G&A).

From a payment–out perspective, list all fixed payments, followed by payments with leeway. Enter the fixed payments in their regular time of the thirteen weeks and assess the non–fixed payment timing.


The Analysis

To manage a tight cash situation:

Look for creditors that are looser with repayment demands and where the supplied product or service is not critical to your business. Push these out a bit to buy time (be upfront to not misrepresent the state of your company).


Reduce ongoing needed costs, subject to cash availability, through vendor discounts for early payment.


Look at further reducing costs through use of cheaper material, vendor consolidation for better pricing, offshoring, assessment technology investment for offsetting, reducing staff and staff hours, etc. Changes need to be actioned in a long–term context to not hamstring the company.


Further analysis can be done by identifying the appropriateness of costs by assessing year–over–year changes internally and further by benchmarking competitors. If any cost seems out of line, investigate why.


In Closing

Simply put, managing finances is a timing issue. Until revenue is received, always bridge the time between outgoing cash expense payments and incoming revenue receipts. A TWCF forecast is a powerful management tool that provides clarity and insight to companies seeking to avoid tragedy. Further, the TWCF provides context to business plans by determining whether enough money exists to execute plans and supply a contingency in case things don’t go as planned.


TWCF provides context to business plans by determining whether enough money exists to execute plans and supply a contingency in case things don’t go as planned.

Integrate the tool into regular reporting and be more likely to stay out of trouble and to expeditiously grow your business.

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