Worry Less about Money with a Cash Flow Plan

by Dan Lacy - November 14th, 2011

One of the biggest stresses in business ownership is having enough money. Enough money to pay employees, pay ourselves, pay vendors and pay for growth. Money is the grease that keeps the business machine running and if we are unable to lubricate our business adequately it does not perform well.

Here are some actual real world examples:

One of your long time customers wants to increase purchases by $50,000 a month; but need extended terms from 30 to 60 days. This represents a 30% increase in revenue for the next 12 months. Your line of credit maxes out on a regular basis. Should you do it?
You have an opportunity to purchase a new piece of equipment that will increase production and revenue by 20% a month. The equipment costs $300,000, revenue will increase $1,400,000 for the year, inventory and accounts receivable will increase $350,000. Profit is projected to increase $250,000. Should you do it?
Your industry is experiencing dramatic raw material price increases. You need to raise your prices to your clients but cannot raise them too quickly in fear of loosing customers to your competition. Your lender has already said they will advance you enough working capital to bridge the inventory growth and transition to the higher prices; but they want to see when you will be able to pay back the extension. How do you prove to the bank that this will work?
The best solution to these three and a hundreds of other “money” issues is the cash flow forecast. What is a cash flow forecast?

It predicts your uses and sources of cash on a monthly (or weekly) basis to determine if you have enough cash to operate effectively.
The forecast is predicated a lot on what you have planned or projected in your profit and loss statement – revenue, expenses and profit.
It also takes into consideration any cash influx or out flow that doesn’t affect your profit and loss statement – line of credit uses, principal debt repayment, distribution (dividends), accounts receivable collections and accounts payable days outstanding.
It is a forecast — so it can be updated any time you feel it is important to update your cash flow forecast. It is recommended that it be done at least monthly and for those companies with cash flow troubles – do it weekly.
How do you create a cash flow forecast? There isn’t a boxed software program that I am aware of that will create a decent, forward-looking cash flow forecast. Most of them have to be built on an excel spreadsheet. They are not hard to do; but they take understanding of how your business works and the critical elements of how cash flows through your business. Once you have one, you can use it extensively to help you answer questions like those I presented at the beginning of this article.

Dan Lacy
Growth & Profit Coach, Financial Strategist, Cash Flow Doctor, CEO Mentor
phone: 765-644-8887

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