Cash Flow Improvement
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."
ABC Company, LLC
Internal Cash Flow Projections
January to July, 20X1
| JANUARY | FEBRUARY | MARCH | APRIL | MAY | JUNE | JULY | |
|---|---|---|---|---|---|---|---|
| Operating Cash, Beginning Source of Cash: Receivable collections Customer Deposits Loans from the bank - Revolving Line Other |
$125,000 225,000 10,000 - - |
$82,000 200,000 15,000 25,000 - |
$54,000 175,000 10,000 35,000 3,000 |
$11,000 225,000 12,000 55,000 - |
$(58,000) 250,000 10,000 35,000 - |
$11,000 275,000 15,000 30,000 - |
$8,000 250,000 10,000 20,000 - |
| Total Sources of cash, including beginning | 360,000 | 322,000 | 277,000 | 303,000 | 237,000 | 309,000 | 288,000 |
|
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 |
65,000 45,000 60,000 28,000 50,000 25,000 - - - 5,000 |
65,000 45,000 60,000 28,000 40,000 25,000 - - - 5,000 |
70,000 38,000 60,000 28,000 30,000 25,000 10,000 - - 5,000 |
65,000 55,000 60,000 28,000 20,000 25,000 - 65,000 38,000 5,000 |
65,000 45,000 60,000 28,000 20,000 25,000 - - - 5,000 |
70,000 55,000 60,000 28,000 20,000 25,000 - - 38,000 5,000 |
65,000 45,000 60,000 28,000 20,000 25,000 - - - 5,000 |
| Total Uses of Cash | 278,000 | 268,000 | 266,000 | 361,000 | 248,000 | 301,000 | 248,000 |
| Excess (Deficit) of Cash | $82,000 | $54,000 | $11,000 | $(58,000) | $11,000 | $8,000 | $40,000 |
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.
What can be done in January to make sure the company does not run out of cash in April?