cash flow improvement
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Cash Flow Projections
Disruptions: Owners of privately-held companies hate surprises, especially on the topic of cash. There are few things that wrench the gut of a business owner as much as discovering, with very little time to react, that their company is short on cash to make payments on important things like payroll, rent, debt service, vendors, etc.
Good news: There is a discipline that can help take surprises out of cash flow, named the Cash Flow Projection.
The future: Done properly, a Cash Flow Projection can give an owner the ability to look into the future to see the cash that will flow into and out of the company.
First step: The first step is to find an internal person you can trust to prepare and maintain the Cash Flow Projection. This person should have integrity, good work ethics and the ability to think through different scenarios while working weekly on the Cash Flow Projection document and process. Keeping cash flow matters confidential is paramount for this person.
Second step: Have this person either set up a Cash Flow Projection similar to the following one or have a skilled professional train this person to create and update this document.
WSJ: The Wall Street Journal (WSJ) and Random House, Inc. approached B2B CFO® in 2008 with an idea they had, which was to write a book to help business owners on this topic. They asked us to create a Cash Flow Projection that could be educational for the readers of their book. The following chart was published in their book, The Wall Street Journal, Complete Small Business Guidebook (pp. 90-91).
Shortfall: The WSJ book states, “… the chart on page 90 shows ABC Company’s operating cash, beginning in January and outlines its estimated sales and expenses through July. You’ll see the benefit of making such a chart when you look at the month of April, which shows a deficit. Assuming this business owner prepared the cash flow projections in January, he or she now has four months to come up with a plan for surviving the projected shortfall.”
Working
Capital
ABC Company, LLC
Internal Cash Flow Projections
January to July, 20X1
Operating Cash, Beginning
Source of Cash:
Receivable collections
Customer Deposits
Loans from the bank - Revolving Line
Other
Total Sources of cash, including beginning
Uses of Cash:
Payroll, including payroll taxes
Accounts Payable - Vendors
Other overhead, including rent
Owners' Guaranteed payments
Line of credit payments
Debt Service payments
Capital expenditures from operations
Income taxes - prior year
Estimated income taxes - current year
Other
Total Uses of Cash
Excess (Deficit) of Cash
January
$125,000
225,000
10,000
-
-
360,000
65,000
45,000
60,000
28,000
50,000
25,000
-
-
-
5,000
278,000
$82,000
February
$82,000
200,000
15,000
25,000
-
322,000
65,000
45,000
60,000
28,000
40,000
25,000
-
-
-
5,000
268,000
$54,000
March
$54,000
175,000
10,000
35,000
3,000
277,000
70,000
38,000
60,000
28,000
30,000
25,000
10,000
-
-
5,000
266,000
$11,000
April
$11,000
225,000
12,000
55,000
-
303,000
65,000
55,000
60,000
28,000
20,000
25,000
-
65,000
38,000
5,000
361,000
$(58,000)
May
250,000
10,000
35,000
-
237,000
65,000
45,000
60,000
28,000
20,000
25,000
-
-
-
5,000
248,000
$11,000
June
$11,000
275,000
15,000
30,000
-
309,000
70,000
55,000
60,000
28,000
20,000
25,000
-
-
38,000
5,000
301,000
$8,000
july
$8,000
250,000
10,000
20,000
-
288,000
65,000
45,000
60,000
28,000
20,000
25,000
-
-
-
5,000
248,000
$40,000
$(58,000)
Key Assumptions:
(1) 80% of sales will be collected the month after the sale.
(2) 20% of sales will be collected the 2nd month after the sale.
(3) Payables are due in 30 days.
(4) 75% of eligible receivables can be used for the revolving line of credit.
The Company is projecting negative cash in April. What can be done in January to make sure the company does not run out of cash in April?
2002-2017 B2B CFO®
