Plan to Avoid Those Nasty Cash Crunches

Avoiding cash crunch surprises means forecasting your cash flow ahead of time. But few business owners, even multi-million dollar operators, do any sort of cash flow forecasting for their businesses. To me, it's like driving a large bus down the freeway at high speeds with a completely covered windshield. It's a thrill I'd rather not experience as it tends to lead to some fiery crashes.

I think the lack of cash flow planning among business owners is due to a number of reasons, which include:

1. They don't know what a cash flow forecast looks like much less how to create one.

2. They don't know the value of one.

3. Because forecasting requires making educated guesses, they're afraid of being wrong.

4. They are afraid of finding out that they actually might run out of cash. (We call this the hear no upcoming evil, see no upcoming evil syndrome.)

It's a shame because it's not rocket science (or even high level finance) and having one can help you sleep so much better at night. Let's take these objections one at a time.

#1 - What is it and how do you make one? A good cash flow projection simply shows you what cash you expect to start with at the beginning of your first month, what cash you expect to take in from cash sales and collections, less what cash you spend on payments to vendors, operations, capital purchases, and loan principal reductions. The result is the amount of cash you'll have left over at the end of each month. Ending cash from one month then becomes your beginning cash for the next. Repeat these steps as needed to the end of your projected time frame. It's like a check book, only it shows your predicted cash inflows and outflows on a monthly basis. You can use a simple handwritten worksheet, or use a spreadsheet to create formulas.

#2 - What's the value? If you know ahead of time that you are going to run out of cash, you can create a plan to prevent the crash. For example, you can share with your banker how much money you need in a credit line and how soon you can pay it back. You can implement management efficiencies such as moving inventory faster, selling unproductive assets and cutting costs. Bankers tend to like this approach much better than getting a last minute, panicked call to fund the next day's payroll.

#3 - The guessing factor. A wise person once said that the only thing we know when we forecast is that we're going to be wrong. So, for all you perfectionists out there: get used to it! Use your prior selling and spending patterns as a starting point and adjust when necessary.

#4 - The fear factor. If you are concerned enough about your cash situation that you are afraid to forecast it, then you probably really need to start right now. 

Ready to try? I have several simple (and free) spreadsheet versions that I am happy to send you. Contact me to request your free spreadsheet.