Nothing irks a business owner more than the last minute “cash dump” into his or her company to make payroll or pay a key supplier.  Cash flow changes rapidly in high-growth companies.  Managing these changes well is crucial to having cash on hand to fund accelerated growth.  Those of us who have had to manage through low-cash situations can attest to how crippling it can be to a company.

Avoid the last-minute cash drain by doing what CFOs do to know when a company will run out of cash.  Prepare a weekly cash flow forecast.

Preparing a Cash Flow Forecast

We usually prepare a weekly cash flow forecast for the next 13 weeks and “roll” it each week.  We start with a beginning cash balance, then summarize key sources and uses of cash:

Sources

  • Accounts receivable collections
  • Collections for future sales
  • Debt or equity financings

Uses

  • Sales & marketing expenses
  • Overhead (payroll, rent, T&E, office costs, etc.)
  • Inventory and logistics costs (if applicable)
  • Accounts payable at the time of the forecast

We group these major into areas on a summary tab in our spreadsheet, then create separate tabs to provide more detail.  You can see an example here.

Cash Flow Forecast vs. Financial Projection

A cash flow forecast is different from a financial projection.  A financial projection provides a long-term view of company financial performance.  It’s usually prepared for a period of three to five years.  Its purpose is to set performance metrics to build the company’s valuation.  The financial projection mimics the company’s financial statements so you can easily compare actual vs. budgeted performance.

The cash flow forecast is more granular.  It is designed to provide weekly feedback as there may be certain weeks, such as payroll, where the cash drain is large.  Many companies that closely manage cash have a financial projection and a cash flow forecast. Those that are more flush may just use the financial projection as their forecast.

Beware These Assumptions

Cash flow projections are only as good as the data they rely upon.  These are some things we see kill a cash flow projection:

  • Overly optimistic sales forecasts
  • Unrealistic AR collections
  • Too many large 1-time purchases that become recurring purchases
  • Undocumented inventory purchases (no purchase order)
  • Forgotten accrued payments, such as commissions or royalties due

If you are tightly managing cash then it is imperative you underestimate income and overestimate expenses.  Otherwise, you risk running out of cash sooner than expected.

Don’t Have Time to Create A Forecast?

If creating a weekly cash flow forecast seems out of reach, there is something you can do that will not take a lot of time and will keep you informed.  On a weekly basis, logon to your online banking and review your balances and transactions.  Then, logon to whatever system you use to track your sales and review your weekly and month-to-date sales.  Look for patterns… is cash generally going up or down?  Do there seem to be more checks for larger dollar amounts? Are sales trending up or down?

The point here is to establish a practice where you are tracking actual cash flows with data.  You’re detecting patterns and keeping yourself informed.  It will be imprecise and you’re bound to miss a few things.  For only a few minutes per week, however, you may avoid the dreaded “cash dump.”