Cash Flow Management
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Cash Flow Management

Cash Flow Management

More important than ever in an uncertain economy

Picture yourself driving down a curvy road at night with a dirty windshield. That’s what running your business is like without a forecast. Now visualize yourself on today’s unpredictable business track. With all of today’s bumps and dips, it’s time to pull over, squeegee off your windshield, and get a fresh, clean view of what’s ahead. While the road no doubt is still full of unforeseen hazards, seeing the curves ahead and making adjustments you reach them gives you a distinct advantage. You’ll have a fighting chance to navigate that turn—and the ones after that—adjusting and recalibrating as you go. 

“2020 is too unpredictable to plan”

It’s tempting to throw your 2020 budget out the window and wing it. Not so fast. Your budget isn’t a report card. It’s a planning tool that helps foresee future cash shortages so you can get your financing in place now. This type of planning is more important than ever. Continually refine your rolling 12-month plan (this month plus 11 more). Be flexible. Adjust your plan frequently as the landscape becomes clear. Don’t write off budgeting for 2020. Stay the course.

“My sales are going up—why worry?”

Increased sales do not always mean more cash. In fact, an especially rapid rise in sales can mean less cash. Why? Because as today’s sales increase, we’re already writing checks for payroll and inventory to support tomorrow’s sales. If you carry accounts receivable, it will take a while to collect. So you have a lot of money going out without much coming in, at least for a while. The timing gap between when you cut your checks and when you collect the money can happen even if your business is profitable. It causes cash shortages (aka dire problems and unhappy bankers). You can prevent the shortages by planning.

Not all businesses have this timing gap. For those that collect sales immediately, get paid for services daily, and don’t carry inventory, a profitable month could yield positive net cash. Still, even they may find cash balances are slow to recover. Many are behind the 8-ball with large credit card balances and credit lines. Even as profits return, it will be months before we dig out of the holes created in the first half of 2020.

Managing cash flow beyond sales 

Congratulate yourself for rebounding sales, but monitor how the following items are affecting cash flow.

Cost changes, especially staff. Has your cost structure changed? Pricing changes and workplace safety costs may lessen profitability. Do you have the right team in place for your level of sales? Do you need different talents to respond to market changes? Is staff productivity compromised by social distancing?

Debt repayments. How much of your PPP loan will be forgiven? What other obligations are there? Back rent or supplier balances, credit card balances, lines of credit, and term loans all will consume cash.

Inventory fluctuations. Do you have the right stuff? Our local wine shop’s revenues increased during stay-at-home orders (go figure). Still, while customers bought more wine, they purchased lower-priced products. Rebalancing inventory mix to match customers’ new buying patterns can require additional investment. Some industries have significant investments in inventory that’s out of season or didn’t sell. It will take a cash infusion to reinvest in new products.

Accounts receivable. Will collections slow? Will bad debts rise? What problems have your customers experienced? You’re doing a good job managing your cash. Are they? If not, guess who becomes their new banker? You!

Build a rolling 12-month plan

Your rolling 12-month plan should incorporate three things: 1) a sales plan (your best guess of forecasted revenue); 2) profit plan (your budget for expenses, including staff reductions or recruitment); and 3) a cash flow plan (your borrowing plan that insures you’ll have the funds to cover the impact of the timing gaps and debt repayment on your cash balance).

As we bump along this muddy, messy, curvy road, we need a clean, clear lens to find our way. Your rolling 12-month plan will provide clarity, enabling you to:

  • visualize multiple possibilities and estimate cash requirements given different sales estimates;
  • prioritize spending and make essential staffing decisions;
  • quantify the cash impact of changing customer collection patterns and inventory management;
  • estimate how much short-term credit you will need and when you can pay it back; and
  • communicate more effectively with your banker and suppliers.

The value of a cash flow plan

Most well-run businesses use a budget that includes revenue, expenses, and profit. I’ve always been a big fan of extending P&L budgets to cash flow plans by considering the impact of timing gaps and debt repayments on cash flow. The resulting cash flow plan is an essential tool today, given the excess debt and inventory challenges created by closures or slowdowns. 

So why doesn’t everyone do this? Because it’s hard! We use an Excel template to make cash flow planning easier. Even if you don’t think cash flow planning is fun or easy, it’s important to gain a clear view of the muddy road ahead. (You can download free cash flow planning tools from the Profit Soup website).

Barbara Nuss, CPA, is the president and founder of Profit Soup, a financial education organization specializing in providing services to franchisors and franchisees that enable them to trust their numbers, focus on priorities, make better decisions, and earn more profit. Learn more at or call 206-282-3888.

Published: July 24th, 2020

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