Head off Financial Stress with a 90-Day Cash Flow Forecast

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Short-term cash flow challenges are very common among small businesses. When a business responds poorly to a cash flow challenge, its ability to continue operations may be jeopardized. Unfortunately, a poor reaction to a cash flow challenge is what often happens.

A common approach is for a business with tight cash flow to monitor its cash balance daily and estimate accounts receivable for the next several weeks. The problem with that approach is that it doesn’t help you as the owner prepare for a cash crunch due to hit four to twelve weeks in the future. That’s why we recommend clients use a 90-day cash flow forecast.

Rolling 90-Day Forecast

The surest way to avoid an unpleasant cash flow surprise is to use a 90-day rolling cash flow forecast. The forecast usually takes the form of an Excel spreadsheet that shows the expected weekly cash receipts and payments. These are presented line by line and tracked weekly.

To create the forecast requires beginning cash balances, estimated cash receipts, estimated payroll and taxes, estimated operating expenses, payments coming due on notes and leases, and lines of credit.

Creating and updating a 90 day cash flow forecast provides numerous benefits:

  • Visibility into your short-term cash needs
  • Financial discipline in measuring your inflows and outflows of your business; i.e., “What gets measured, gets managed.”
  • Insights into your operations and its short-term flow of activities

Estimating Cash Inflows and Outflows

Inflows

Estimating cash receipts for a 13-week period is one of the more difficult components of the model.  Whether your customers pay in a timely manner is typically a function of their own cash flow positions.  Don’t be deterred from making your best estimates, knowing that actual receipts will differ from your estimates. Use recent payment performance of each customer as a guide.

Depending on the number of customers involved, you may want to create a line on the spreadsheet for your largest customers to identify their specific collection pattern independent of the rest of your customers. Alternatively, if your customer base has numerous small customers, you may want to create a separate tab that provides a general pattern of collection from your monthly sales.

Outflows

Payroll and related taxes are generally easier to estimate because for most businesses, the figures may not change much week to week or they change in a predictable manner. Payrolls that include commissions are more difficult to estimate.  One way to estimate commission would be to obtain a historical trend of commission expense as a percent of sales. Then using this percent apply it to the collected sales or billed sales (whichever the commission is based on) subject to commission and put the amount in the period you expect to pay it.

Cash outflows for accounts payable and operating expenses can be easier to forecast.  We recommend laying out the general timing of when you typically pay an expense. For example, office rent is typically due on the 1st of each month.  In this case, you may show the payment as an outflow in the last week of the prior month to ensure the check arrives on the due date.  If you see headwinds ahead in your cash flow, keep your vendors apprised of your ability to pay and reward their patience as best you can.

Stay in Control of Cash Flow

Business conditions change quickly today.  Keeping a tight rein on cash flow is a small business survival skill and the life blood of a company. The 90-day rolling forecast is a good tool that can help you stay in control of your cash flows. For a forecast to be accurate and relevant, it should be monitored on a regular basis and updated with forecast compared to actual. See where the differences occur and adjust your forecasting for any trends that you see. When the forecast is used this way, it becomes a tool for active management of a business’s cash position.

If you need help putting together your forecast, contact us or check out our Cash Flow Tool Kit

Get Personal with Your Business Financial Planning

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As a business owner, aligning business financial planning with personal financial goals is essential for your long-term financial health. But how to go about it successfully?

Here are 8 key strategies we recommend:

  1. Separate Finances: Maintain distinct accounts for personal and business finances. This ensures clear tracking of cash flow, expenses, and tax obligations, reducing financial complexity.
  2. Set Clear Goals: Define both personal and business financial objectives. For example, retirement savings, family expenses, and business expansion should align to support overall wealth-building strategies.
  3. Pay Yourself Strategically: Establish a salary or draw of consistent income that the business can support. Avoid withdrawing erratically because it disrupts cash flow and personal budgeting.
  4. Leverage Tax Strategies: Optimize tax planning for both personal and business finances. Utilize deductions, credits, and retirement contributions to reduce taxable income and maximize savings. However, don’t use strategies that may reduce your tax bill, but ultimately cause harm to your cash flow needs.
  5. Build Emergency Funds: Maintain separate emergency reserves for personal and business needs to address unexpected challenges without compromising either. How much to maintain? This is a personal question that relates to 1.) how much risk you are comfortable to take and 2.) how reliable and consistent your cash flow is from the business. You often hear 3-6 months of expenses as reasonable. In some situations, the Numbers Coach recommends over 12 months, due to the unreliability of business cash flow. (See this recent post for more guidance.)
  6. Plan for Retirement: Use tax-advantaged retirement accounts like SEP IRAs or solo 401(k)s. These account allow higher contributions for self-employed individuals, linking personal retirement savings with business success.
  7. Manage Debt Wisely: Balance personal and business debt to avoid over-leveraging. The Numbers Coach philosophy is to minimize the use of debt. When it is used, then prioritize debt repayment while ensuring sufficient liquidity.
  8. Consult Professionals: Work with financial advisors and accountants experienced in both business and personal finance to create a cohesive plan tailored to your goals. But remember, you are the only one who truly cares about your money. As much as your advisors try to have your best interest at heart, it is up to you to learn and know your numbers.

By integrating these aspects into your business and personal financial planning, you can build financial stability, meet personal aspirations, and position your business for long-term success.

Want to Avoid Running Out of Cash? Know Your Working Capital Requirement

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Does running out of cash keep you up at night?  If so, you are not alone.  Many business owners and leaders report worrying about the amount of cash available in their businesses. 

However, there is a way to measure how much money you need to operate your business without running out of money. It’s called the Working Capital Requirement (WCR).  By calculating the WCR, you will know how much cash you need to have readily accessible to sufficiently operate your business

The calculation is as follows:

Working Capital Requirement $= Cash Conversion Cycle (Days Receivable + Days Inventory – Days Payable) X Average Daily Sales (12 months sales / 365 days)

This means that you need to keep access to cash in the bank, line of credit, credit cards and other financing sources equal to this number.

For example, if Days Receivable is 30 days, Days Inventory is 45 days, Days Payable is 35 days, and annual sales are $1 million, then your working capital requirement would be: (30+45-35) X $2,739 ($1,000,000/365) = $109,600. Having this much access to ready cash will ensure you maintain day-to-day operations without running out of cash.

What is your working capital requirement? Use our Tool Kit to help you calculate

Need more guidance on how the WCR and other key metrics affect your business’s financial health? Schedule a free consultation with our Numbers Coach to discuss metrics that make sense for your business.

Understanding Net Income vs. Cash Flow (and Why it Matters)

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When discussing the financial health of a business, people often use the terms “net income” and “cash flow” interchangeably. This is technically incorrect, as the two concepts are very different. While it is important to understand the distinction between them, it is also important to recognize that they both have an impact on the financial health of a business.

Net Income

Also known as “net profit” or “the bottom line,” net income is the amount of money that a company has left over after all expenses have been paid. It is calculated by subtracting all expenses, including cost of goods sold, taxes, and operating costs, from total revenues. Net income is the amount of money that a business must pay out to shareholders, reinvest in the business, or use to pay down debt.

Cash Flow

Cash flow, on the other hand, is the amount of money that a business has coming in and going out. It is calculated by taking the total amount of cash that a business has on hand at the beginning of a period and adding any new cash that came into the business (ex: sales), and then subtracting any cash that left the business (ex: expenses). Cash flow is an important indicator of the financial health of a business, as it shows how well the business is managing its money.

What’s the difference, and why should you care?

The main difference between net income and cash flow is that net income is a measure of profitability, while cash flow is a measure of liquidity. Net income measures the profitability of a business by looking at the net amount of money that is left after all expenses are paid. Cash flow, on the other hand, measures the ability of a business to generate and manage cash. Cash flow is important because it shows how well a business can pay its bills and reinvest.

Net income is a measure of the long-term performance of a business, while cash flow is a measure of the short-term performance.

  • Net income is a measure of the overall profitability of a business over time and is used to determine the value of a business.
  • Cash flow, on the other hand, is a measure of how well a business is managing its money in the short-term and is used to determine how much money a business needs to pay its bills and invest.

Both net income and cash flow are two metrics that are critically important in understanding the financial health of a business and managing a business’s finances.

Need help with defining these two key performance indicators? Check out our Numbers Coaching services and our KPI Toolkit.

Profit Answer Man Podcast: Increasing Cashflow with The Numbers Coach Mike Iverson

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In this episode, Rocky sits down with Michael Iverson –  the founder of the Numbers Coach, whose services include the preparation of key financial functions such as budgeting, cash flow forecasting, banking and capital funding, mergers and acquisition activity and general accounting for month end analysis and decision making.

In this episode, you will learn the following:

  • Understand your financial numbers and gain insights that can drive your business forward.
  • Master the art of cash flow management to keep your business running smoothly even in uncertain times.
  • Learn how to navigate through economic downturns and recession-proof your business.
  • Discover the secrets to creating financial reserves that will provide stability and peace of mind.
  • Take control of your financial future by implementing effective financial planning strategies.
  • Learn how to make informed decisions that will improve your business’s profitability and success.
  • Gain the confidence to face uncertain times head-on and come out stronger and more resilient.

Company Growth: Slow and Steady Wins the Race

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Most business owners, CEOs, and CFOs associate the rapid growth of a business with success. But you don’t have to search too long or far to find a company that met its demise after an attempt to expand at a fast and furious pace.

Of course, most business owners aren’t going to scoff at the idea of their small, startup company becoming the next Amazon or UPS! Lofty goals are admirable, but it is wise to proceed with caution. It’s not uncommon for the owner of a booming business to be overconfident and make the mistakes of growing too fast.

Mistake #1: Lack of Cash

One of the biggest problems of rocket-speed expansion is a cash flow that becomes a cash trickle, or even a cash desert. Growing a business takes money, often more money than there is in the company piggy bank. Up-front investment capital is needed for assets such as building and equipment as well as day-to-day operating expenses like salaries and inventory. Pouring capital into a new venture is always risky because no one can read the future. Unexpected events and circumstances affect the economy, which in turn can affect your business.

Mistake #2: Lack of Quality Control

Quality control is another aspect of a business that can suffer with the too-much-too-fast approach. The pressure to increase production puts stress on over-worked employees that may push them to cut corners. Hiring and training qualified people take time and can be hard to keep up with production. Morale can become low and tension amongst employees can build.

The downsides of rapid growth aren’t the only reason to consider taking a slow and steady approach to expansion. Business owners who learn to trust the process, take time to enjoy the fruits of their labor, and appreciate loyal employees seem to enjoy their success that much more. Speed can get you there faster, but it can also kill the business before it arrives at its destination.

Growth is a good thing but do it within the capabilities of the business. Every business has a “speed limit,” often referred to as the Affordable Growth Rate (AGR). Your company’s profitability and capital structure will dictate how fast you can grow. For help determining your company’s AGR, check out our Financial Model Tool Kit

Want More Cash Flow? Look At Your Inventory

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Have you ever been told your business made a nice net profit, but there is hardly any money in the bank account?

Cash flow for a business is more than just making a profit. If you have an inventory of products that you sell to your customers, then the amount of inventory you keep on hand and cycle through to sales will impact your cash flow. It’s one of the four pillars that drive cash flow (check out our articles on the other three: A/R, A/P and EBIDTA).

Maintaining a proper level of inventory is important to help sustain sales growth. However, too much inventory can lead to cash flow issues and restrict a company’s ability to meet its obligations. Customer buying patterns and other economic factors can all help determine how quickly you can cycle through your inventory.

Understanding how many days of inventory may you have on hand is an important measure for your cash flow. Knowing this metric can help you spot trouble where inventory in your warehouse may become obsolete.

How do I measure inventory cycle?

Below is a formula for calculating the number of days inventory on hand.

  • Formula
    • Cost of Goods Sold / 365 days= daily cost of goods sold
      • Inventory / daily cost of goods sold= days of inventory on hand
  • Example:
    • $500,000 / 365 days= $1,370 daily cost of goods sold
      • $75,000 / $1,370= 55 days of inventory on hand

In the above example, this company has approximately 55 days of inventory on-hand, or in other words, the company turns over inventory a little over 6 times a year.  This metric is dependent on many factors including supply chain constraints and vendor source opportunities.  The important fact is to measure this regularly to understand what it means to cash flow.

For instance, if the company reduces its days of inventory by 5 days down to 50 days, then it would have approximately $7,000 more cash in its bank account.  Managing inventory levels is as much an art as it is a science based on the numbers.  We don’t have a crystal ball to know how our customers might change their buying habits or when an economic event may occur that impacts our industry.  However, knowing how to measure our inventory in relation to how it impacts cash flow is important knowledge to make timely and reasonable decisions.

Do you know your inventory days on-hand?  If not you may find yourself asking the question of why you had such a profitable year, but you don’t have any cash left in the bank. Check out our downloadable template to help you measure this important metric. Let us know if you have any questions.

Cash Flow Tips For Uncertain Times

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I’ve been watching the news and talking with colleagues and clients and wanted to share some strategies with you that may come in handy as you navigate through uncertain times.

Consider these cash preservation ideas…

  • Research refinance options for any high interest loans and ask for some or all of the closing costs to be waived.
  • The Small Business Administration has created a program to fast track low interest loans under its Economic Injury Disaster Loan, visit: www.sba.gov/disaster
  • Reach out to your lenders about deferring payments, or reducing to interest only payments, on debt.
  • Ask your landlord if you can pay rent at the end of the month (in arrears) for the next 90 days.
  • Ask your landlord about reducing or deferring Common Area Maintenance (CAM) charges for the next 90 days.
  • Call clients to see who can pay faster/earlier.
  • Call vendors to see if you can get extended terms or defer some portion of invoices to a later date.
  • Ask vendors to take payment on a company credit card.  Ask the vendor to charge the amount just after the credit card statement drop date.  This can defer a payment from 15-45 days if timed correctly.
  • Reach out to your credit card company to ask for reduced or zero interest for the next 90-120 days.
  • Bill customers as quickly as possible.
  • Consider whether you have any customers who might pay now for future delivery of services.
  • Defer your personal tax return filing and payment to July 15th.  The IRS issued recent ruling that is allowing a delayed 2019 tax filing until this date.  However, if you are owed a refund file your return now to get the funds.

If you think of other ideas, I’d love to hear them!  My belief is that we will come out of this stronger and definitely together when times are tough.  Stay well and here’s to more cash flow coming into your company!

Mike

Preserving Cash In Uncertain Times

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I’ve been watching the news and talking with colleagues and clients and wanted to share some strategies with you for preserving cash that may come in handy.

1. Research refinance options for any high interest loans and ask for some or all of the closing costs to be waived.
2. The Small Business Administration has created a program to fast track low interest loans under its Economic Injury Disaster Loan, visit: www.sba.gov/disaster
3. Reach out to your lenders about deferring payments, or reducing to interest only payments, on debt.
4. Ask your landlord if you can pay rent at the end of the month (in arrears) for the next 90 days.
5. Ask your landlord about reducing or deferring Common Area Maintenance (CAM) charges for the next 90 days.
6. Call clients to see who can pay faster/earlier.
7. Call vendors to see if you can get extended terms or defer some portion of invoices to a later date. 8. Ask vendors to take payment on a company credit card.  Ask the vendor to charge the amount just after the credit card statement drop date.  This can defer a payment from 15-45 days if timed correctly.
9. Reach out to your credit card company to ask for reduced or zero interest for the next 90-120 days. 10. Bill customers as quickly as possible.
11. Consider whether you have any customers who might pay now for future delivery of services.
12. Defer your personal tax return filing and payment to July 15th.  The IRS issued a recent ruling that is allowing a delayed 2019 tax filing until this date.  However, if you are owed a refund, file your return now to get the funds.

Congress is in the process of an enacting special legislation called the “CARES Act” which is in the Senate at this time.

If you think of other ideas, I’d love to hear them!  My belief is that we will come out of this stronger and definitely together.  Scientists around the world will find the path through for our collective well-being.

Stay well!  And if you have any questions, concerns or just want someone to talk through your ideas, don’t hesitate to reach out.    Mike

Want More Cash Flow? Check your EBITDA

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The life blood of any business is its ability to generate solid cash flow. Without positive cash flow, a company will eventually go out of business. This TIP will focus on one of four key pillars that drive cash flow. In this case we will look at “Earnings Before Interest, Taxes, Depreciation, and Amortization,” or more commonly known by the moniker EBITDA.

Where do you find this metric? One of the financial statements that you can get from your accounting system is the profit and loss statement. The very last number of this statement is typically labeled “net income.” Net income is the profit you have left over after paying all your expenses. When we add back to net income the interest expense, depreciation expense, amortization expense, and income tax expense we get the number for EBITDA.

EBITDA formula:

Net income +

  • Interest expense
  • Depreciation expense
  • Amortization expense
  • Income tax expense

= EBITDA

EBITDA is important for two reasons:

  1. It is a general indicator of your company’s ability to generate cash flow from the operations of your business
  2. It is used as part of the formula for valuing a business. Often someone who wants to buy a business will value it based on a “multiple” of EBITDA. In other words, they are buying your company’s ability to produce cash flow now and into the future.

To generate positive cash flow, you need to have a positive EBITDA. Otherwise, you are generally finding yourself starting your cash flow conversation in the negative position and will likely need to borrow money or find investors to provide capital to keep the company going.

Start with a positive EBITDA number and you can be more confident with your company’s ability to generate positive cash flow. Do you know your EBITDA?

Let us know if we can help you with this important metric.

Reassess Your Customer Credit Practices for Stronger Financials

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by Anne Moore Odell

Every time you send out an invoice, it is like you are granting a loan to your clients. Business is built on trust with products and services moving around the world on the foundation that invoices are going to be paid in a timely manner.

However, extending credit can’t happen in a vacuum. It is up to you to create credit policies that keep your cash flow and business healthy. And while having good credit practices in place is always important, it is especially important to make wise credit decisions in today’s difficult economic times.

Here are 5 tips to help you create sound credit policies:

 1. Take the Time to Research

Now is the time to revisit your credit application process. Make sure that your application is thorough. Make the effort to call all supplied references and banks. Although clients are only going to supply positive references, you can still learn a lot about how potential clients work.

Do your homework on prospects by going to the library where free information from publicly traded companies can be found. Consider using a professional credit report service like Dun & Bradstreet , TransUnion or Equifax. For a small fee they can provide credit histories, records of liens against companies, and current financial obligations on larger clients.

“Don’t forget to use your contacts with the various business associations you belong to – they can help gain information about credit decisions,” suggests Mike Iverson, CEO of Trillium Financial. “Through these relationships and through relationships with other vendors, you can learn about potential clients. You might also require information from clients’ accountants, and tax returns,” says Iverson.

2. Consider using a Z-Score 

A Z-Score is a calculation that allows you to figure out the financial health of a company by using ratio values for a “score” that can indicate potential future bankruptcy. A Z-Score calculator can be located at either The Accounts Receivable Network (membership site: www.tarn.com) or at JaxWorks (http://www.jaxworks.com/calc2a.htm )

3. Be Selective

Keep your customers’ credit files up to date. With businesses going bankrupt and changing hands, it is important to update your credit information on existing clients, increasing or decreasing credit limits as needed.
“In this market you need to be discerning regarding who you are offering your services and products to,” says Marc D. Smith, Vice President, Magnolia Financial, Inc, based in Spartanburg, SC. “Fire customers if they don’t meet your credit requirements.”

Because of the reduction in sales that many businesses are seeing across sectors and industries, businesses are facing increased pressures when it comes to extending credit. However, just because a client is interested in your product or service it doesn’t mean that you need to accept every application.

“In my experience, people are lowering some of their credit limits,” says Iverson. “You should consider your accounts receivables to be much like an investment portfolio—you have invested in your customers and you want your portfolio to be profitable.”

Working with customers before problems and outstanding invoices occur is the best approach. In some cases, you can work out new payment schedules. It is also important to include your entire team so that salespeople know clients’ credit and payment histories.

4. Follow Up

“In good or bad times, one of the keys to collecting from customers is timely and accurate billing,” explains Mike Iverson, CEO of Trillium Financial. “That sounds like a no brainer, but sometimes that doesn’t happen. An invoice might have to be approved or reviewed by several different people, which can cause you to lose two, three, or four days in collecting your invoice.”

One effective practice for larger bills is calling to follow up on an invoice two or three days after it is sent to see if everything is in order. This practice not only puts you top of mind with your client but acts as a customer service call that could generate more sales. If the client does have an issue with the bill, then you can quickly solve the problem, generate another invoice and get paid on time.
Another proactive practice is to send monthly statements or even bi-weekly statements, again reminding clients before bills become overdue.

5. Good Relationships are Important

All levels of management are becoming more involved in credit decisions as businesses look to keep the cash coming in. These days CFOs and CEOs are participating in credit decisions with their teams.

One of the main points to remember, however, is that while economic downturns will end, the relationships you form today will continue. Working to preserve the business relationships you have now and creating new working relationships not only generates good will, but also builds a strong foundation to catapult your business when the economy rebounds.

Your Best Tool for Understanding Short-Term Cash Flow

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In a recent article, I shared ideas on how to positively position your company’s financials, even during a slowing economy.  The key is to ensure you have strong cash stores and credit availability.

Today, I will explain a management tool that helps you anticipate your near-future cash flow and identify any areas of weakness: Presenting the 13-Week Cash Flow Analysis. 

You may already use software that allows you to run regular cash flow analyses. These give a more accurate picture than net profit or bank statements.

Initiate your 13-week cash flow analysis by gathering the data needed to build an accurate report:

  • Current bank account and credit card balances
  • Upcoming mortgage or lease payments
  • Estimated cash receipts
  • Estimated payroll and taxes
  • Estimated operating expenses
  • Any other upcoming transactions that will impact cash flow.

The integrity of the report is dependent on the accuracy of the data as well as it being correctly entered or integrated into a spreadsheet or software. For the variable revenue and expenses you estimate, be sure to keep seasonal influences in mind. And remember, you only need to record and predict 13 weeks out – it’s a short-term tool.

A report with solid data and estimates is a good indication of your cash situation over the next 3 months (or, one full quarter). But check the output against your gut:  If the balance seems overly positive in any or all of the 13 weeks, review your estimates, especially sales and accounts receivable forecasts. Being overly optimistic won’t serve you well – if anything, conservative estimates will give you the padding needed to accommodate unpredictable changes.  If you have the time, run worst-, best- and average-case scenarios.

If the report indicates that your company will be cash poor at points during the next 13 weeks, it’s time to review your options:

  • Do you have unneeded equipment or inventory that can be sold to improve fluidity?
  • Are there expenses that can be eliminated, contracts that can be renegotiated or even dissolved, or payments negotiated or delayed?
  • Is it time to implement a collections push?
  • Is your billing and collections process quick and accurate?
  • Are there any loans available to the business?

Once it is set up, maintaining cash flow history and projections is easy. Monitor and update the report weekly, and review your historical projections against actuals to improve your modeling accuracy.

Cash and cash flow are critical to successful operations, and utilizing 13-week cash flow analyses will help you identify gaps and become better at anticipating your future cash needs to keep your business steady. So make proactive cash flow analysis one part of your flexible, resilient business, whether the economy and your customer demand are swinging up, down, or somewhere in between.