Using Cash Flow Forecasting When Things Get Tough

When times are tough for a business, no better management tool exists than a cash flow forecast.

The most important point business owners must understand is cash flow is not profit. It is simply money flowing in and out of your business for any reason. Simply stated, cash flowing in minus cash flowing out equals cash on hand available for paying vendors, payroll, and rent. When cash on hand is a positive number, your business has the necessary funds to operate. When it is negative, you must find sources of external funding to make up the shortfall. Often making up the shortfall for a given week is simply a matter of managing when you pay your expenses (cash going out). Here are some tips on managing cash flow in your business:

• Create a written plan on how you are going to turn around your business. It doesn’t have to be elaborate, and it needs to be a living document that changes as circumstances change. Managing cash flow should be a big part of the plan.
• Use a cash flow forecast to time your payment to vendors so they get paid enough to keep them happy and still provide trade credit.
• Update your cash flow forecast several times a week.
• Look at all your expenses, especially payroll. Trim every expense possible that won’t result in lost sales.
• Use promotions to increase the average sales value of an invoice. For example, if your average sale is $40, try to increase it to $50 by offering a special such as “buy two at regular price, get the third at half price.”
• Sell obsolete or slow-moving inventory on Craigslist or eBay. Any money obtained will improve cash flow. The same is true for selling unneeded equipment.
• Maintain strong open communication with your vendors. Explain your plan for turning around your business and how you are going to pay them.

If your business carries accounts receivable, improving the speed in which your customers pay also helps improve your cash flow. One important key performance indicator you should always know in a crisis is what your A/R turnover is in days. To calculate this figure, first determine what your average daily sales are. Divide the total credit sales for the previous month by 30 to determine this figure.

For example, if you had credit sales of $100,000 in the prior month, your average daily credit sales for 30 days total $3,333. If current A/R is $150,000, divide that number by $3,333. The result is 45, which is your A/R turnover in days.

As the number of days of turnover increases, cash flow worsens; conversely, when collections improve, cash flow improves. Creating a strong plan to improve A/R turnover is critical in times of tough cash flow.

If your business carries inventory, you can convert inventory to cash at a faster rate by discounting, especially if you have excess inventory. If possible, don’t discount inventory below your cost, unless it is obsolete or extremely slow moving.

Download a free Excel-based 13-week cash flow forecast template. Directions for using these forecasts are on the first page of the workbook.

Sam Thacker is a partner in Austin, Texas–based Business Finance Solutions.