Looking Cash Flow Directly In The Eyes

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If you’re like many small to medium-sized business owners, you dread the weekly cash flow review. Worse yet, you don’t have a weekly cash flow review. Or a monthly one. Maybe you are just trying to get by with paying the loudest vendors first and that’s certainly one (stressful) way to operate. However, in my experience, the best way is to take a cold hard look at it, directly in the eyes.

At first, it may be uncomfortable, even overwhelming, but I have found that once you know the reality of the situation you can make better, more strategic decisions.

One day you have this great idea for a product or service. You have some early wins when you float it out to the marketplace. So, you say to yourself, Great, I’m all in!

Well, you’ve skipped a few critical steps. If you’re going to be a business owner who people want to do business with, you need to know the state of your business. You need to know what you can commit to in terms of production levels, employee count, physical locations, lines of credit, cost of goods, and so much more. In order to evaluate these items, I recommend starting with your cash flow position and projection. Even if you have the best idea or product in the world, if you can’t afford to get it to market before you have money coming through the doors, then you won’t ever get the business off the ground.

If you think you’re going to stretch out your vendors until your customers pay you first, then you might find yourself without a product. Your vendors are businesses too, and they need paid in a timely manner. They have all the same burdens that your business has, and burning too many of those bridges will leave you without goods to create your own product; then, you’re stopped dead in your tracks. Abusing your vendors in order to create a business (means to an end?) is not a good strategy.

The cash flow statement is not your P&L (historical financial data) and it’s not your Balance Sheet (net worth, a snapshot in time). It is a living, breathing report of your potential inflows and outflows of the cold hard cash-ola. In some ways, this is the most important indicator of your business’s success. If you can pay the bills (on time), have money saved for taxes, pay your employees, pay yourself, and still have money in the bank… you’re ahead of most. So, let’s get you there!

When creating your cash flow projections, you need to start with the history of where you’ve been and where you are now. That gives you information on which to base your assumptions. There are typically a lot of assumptions that go into cash flow analysis and forecasting. I find it helpful to write down the assumptions as you’re creating your statement. You’ll likely refer to these assumptions as you move forward with your projections and as your projections play out into reality.

Being realistic while creating a cash flow statement is pivotal, because reality is the one place cash flow problems don’t hide. I always recommend and follow the conservative path when making my assumptions for a business owner. You may need to involve other people (such as sales personnel or marketing), when creating some of the assumptions. The CEO will typically push me to be more aggressive with those assumptions, but at the end of the day, it doesn’t really help the situation. Cash in is cash in, cash out is cash out. If all the wheels stopped turning at the same time, and the chips fell, what money is owed to you and by you. That’s what we’re capturing with the cash flow prediction.

After establishing your baseline and recording when the cash has come in and when it went out, you’ll begin to build out the future projections. There are software programs that can do this for you, and there are financial systems with a cash flow projection built-in. But, be mindful that if you use an “automated” system that is basing future cash projections on past behavior, which was probably you playing the shell game, will produce a very skewed projection. That is why I usually encourage the business owners to use a spreadsheet in order to evaluate every single entry either day by day or week by week (depending on how tight the business has been or is running).

First, evaluate your sales pipeline, there should be some sort of probability assigned to each potential sale. Drop those into the spreadsheet as the cash inflows. Place them in columns which represent time into the future. Then, look at all your expenses, when they are due (not when you want to pay them or when you think you can pay them), place those in the columns as well. Either make your projected revenue a positive or negative, it doesn’t really matter, but your expenses, as well as your cost of goods, should be the opposite. Then, for each column, add up the inflow and outflows.

Don’t massage the data yet. Evaluate each column, looking for the ones that take you negative. If you have a beginning cash amount, then perhaps that can cover those negatives, however, if you don’t, then that’s where you find your cash flow shortage.Continue this activity for as far out as you can project. I wouldn’t look at it for any less than a year. Being in business is a long term commitment.

Understanding your cash flow for only the next month is irresponsible and you put your employees and health of your business at risk. Review the year in totality. This is where it gets tough, but you’re the one who wanted to be the business owner, and you can do this. Don’t let yourself off the hook and don’t sugar coat it.

Ask questions like: Do you have enough to make it in the short term? Do you have enough week over week? Do you have enough to make it a year or beyond a year? Can you always make payroll? Can you pay taxes when they are due? Can you pay your critical vendors on time? Do you have enough for all the cost of goods you will need to fulfill your customer orders? Are all the sales’ probabilities realistic? As you ask yourself these questions, start to formulate a plan.

If it looks like you need to move due dates, talk to your vendors. Communication is key. Perhaps they are willing to extend you some credit or extend their terms because they know you’re going to be a long-time customer of theirs. Perhaps they are willing to extend terms with an additional interest charge; maybe this is worth it to you because you see the big picture and understand that it is a necessary part of doing business. Or alternatively, are there ways to get your customers to buy faster, put down larger deposits, buy more quantity for a discount? You’re evaluating both sides of the coin, outflow and inflow. It is better to have a slow and steady plan that is attainable, than a fast jerk of the wheel side to side.

I know this goes against what some CEOs want to hear, they want pedal to the metal, but in the long run, it’s the best move for sustainable, controlled growth. This is an iterative process, and again, depending on how tight cash wise, the business is running, I may even evaluate it every day. What happened yesterday or last week in comparison to the projection? Update the statement based on what really happened, new assumptions or new information.

I tend to incorporate the practice of saving the previous week or month before I update it because I want to truly compare what I believed was going to happen with what came to fruition. This baseline helps you make better projections in the future. Keep this document current, and remember it is a live document that should be updated regularly. The creation of it is one thing, but the daily discipline of maintaining it and strategically operating to it, is entirely different.

Once you’ve had the opportunity to really let this information soak in, if you don’t think you can weather the shortage of inflows or the excessive outflows, you’ll need to make some tough decisions. The truth is if the business can’t make it without an investment or it isn’t sustainable, learning that at a loss of $100,000 or $1M down the road, just makes the truth hurt more. I’d encourage you to understand what you’re headed into. The unknown is much scarier than facing reality head-on. If you can create a strategic plan to balance the cash flow and stay on track with your objectives, you’ll sleep better at night. You may know some stressful weeks or months are ahead, but you’re ready for them.

I’ve found that three very positive things come from staring down the barrel of a cash flow projection:

1) Even though you may not believe it, you get relief. Relief from the stress that was created by not having a good plan and often, you get relief because the picture is not as daunting as you thought before you wrote it down in black and white.

2) You gain a confidence in the information. When you talk to your vendors or your employees, that confidence comes through and they have faith that you are working the plan.

And 3) You get clarity of mind. The time, stress and energy you were spending on worrying about the unknown is gone. Your clarity and your focus can now be on running a superior business. Several companies I have dealt with didn’t take the time to walk down this process, so set yourself apart by understanding your current and future cash flow position, it will make you a top-notch business owner!