 Cash flow forecasting. Those three words strike fear into the hearts of many business owners. Why? As we discussed in a previous post, many small business owners simply do not manage their cash inflows and outflows well over time. Couple this challenge with the fact that many businesses inefficiently forecast when faced with expenditures, loans, or a fluctuating market, and you have a recipe for trouble. Fortunately, cash flow forecasting is formulaic and does not have to be painful. In this post, we’ll examine some best practices to help ensure your cash flow remains positive. Determine Peak NeedsFor cash flow forecasting, your financial adviser should be on speed dial. A financial adviser can identify the hills and valleys of production, predict potential surpluses or shortages, and therefore plan accordingly to keep your business running smoothly. You should also seek out a trusted advisor to help you understand your net working capital as a percent of sales. With this knowledge, you can quickly estimate capital requirements related to new contracts, expanding customers, and changing business levels. Leave No Stone UnturnedAccount for everything. Efficient, accurate cash flow forecasting requires access to, and consideration of, all overhead – both recurring and non-recurring. Be sure to account for labor, raw material and energy, as well as non-recurring expenses such as legal fees and tax preparation costs. Additionally be sure to account for non income statement expenses such as loan payments, capital equipment replacements, prepaid expenses and deposits. It is imperative to anticipate every future cash outflow and incoming payment, as well as the timing of payables and account receivables. Identify Barriers And Plan Your SolutionsA significant barrier to cash flow management is ineffective invoicing, which in turn, can delay payments. Be it incorrect information, delaying invoices, or permitting late payments, poor invoicing practices lead to inconsistent delayed cash flow and ultimately harm a company’s operation. Aside from offering payment reminders or incentives, timely invoicing is an easy technique to practice to help rebuild cash flow. Many companies also provide a variety of payment services to streamline the billing process. From apps to online/e-commerce solutions and pay-by-phone systems, digital payment processes can help improve cash flow. Inadequate resource management is a challenge shared by companies today. If not managed properly, expenses and overhead can have an adverse effect on cash flow. Examples of poor resource management include unnecessarily repetitive processes, redundant systems and machinery, rework, unwise investments, and excess office space. Business disputes can also be detrimental, and leave businesses hamstrung and scrambling if proactive measures have not been taken to manage risk. By following best practices, ensuring your policies, business forms, contracts, and governing documents are appropriate for your business environment, and consulting regularly with legal counsel, you may be able to avoid costly business disputes and maintain a solid defense. The Bottom LineCash flow forecasting should be a primary component of any business plan. Because it requires a thorough, proactive, and thoughtful approach, using the tips outlined above will lead to improved cash flow management.
Contact Lauber Business Partners today if you’re interested in learning more about effective cash flow forecasting or need help implementing such strategies into your organization. We have the expertise to transform your operation and help you establish sustainable cash management systems.
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Business owners are often unsure what to expect from their financial person. All financial people are not created equal. There can be significant differences due to experience and aptitude. In companies with revenues between $5 and $50 million financial people generally perform at two different levels. Differences Between a CFO and Controller
Bring the Numbers to Life:
Provide The Metrics for Success
Manage the Cash
Project and Protect
Supply the Financial Perspective
The old business adage that “cash is king” seems more important in this challenging economy. While it’s always important to be in a good cash position, it’s more critical to understand the lifeblood of your business in these uncertain times. A 13-week cash forecast will help give you that understanding and put you in a more powerful position to make business decisions. The forecast should be updated on a weekly basis, so you always have an informed outlook of the coming months. While a 13-week cash forecast is common and represents a reasonable time horizon, you can create a cash forecast for a different time period. The number of weeks you include is not as important as having a report that gives you a reasonably accurate picture of the road ahead. Learn more about cash forecasts by reading, ‘The Cashflow Conundrum: Tips for Keeping Your Company in the Clear.’ 1. Identify Expected Cash Inflows Allocate each of those cash inflows to the week when you expect the cash to be received. Inflows normally include:
2. Identify Expected Cash Outflows Cash outflows commonly include:
Items on the expense side are usually easy to identify, and can be pulled from your monthly accounting records. Receivables are often less clear, and thus become the item in the cash forecast that is most challenging for a business to accurately project. 3. Project When Your Receivables Will Be Paid A good approach to get a handle on these numbers is to create three categories.
4. Add Projection of Cash Receipts from Future Sales Once you have projected when your receivable will be paid, you need to add in your projection of cash receipts from future sales. In some businesses, seasonal activity must be considered in the 13-week cash forecast. For example, a construction company may have a rising payroll in the spring and the related collection of receivables several weeks later in mid-summer. Why is it Important to Have a 13-Week Cash Forecast? The more challenging your cash position is, the more valuable this tool becomes. The insights from a 13-week cash forecast will not only help you better manage your business but also help you communicate with your banker or other outside entity. For example, let’s say you have a significant receipt due in Week 11 but your business will be in a difficult cash position prior to that. This tool gives you the ability to see what you might be able to shift on the schedule to deal with the shortfalls. It also gives you the ability to proactively communicate your situation so that your creditors know what to expect. You will find this goes a long way in gaining cooperation. It’s worth taking the time to establish the process. Once the cash forecast is set up, it’s just a matter of plugging in the current numbers. The report becomes even more powerful when you compare its estimates with actual inflows and outflows. With that actual data, you can adjust the report to increase accuracy. Interested in more information about Finance & Accounting? Read our past blog posts: Partnering with a Fractional CFO to Improve Operational Efficiency Engage a seasoned Chief Financial Officer with extensive skills, experience and strategic insight without paying for a full-time resource. Our fractional CFOs provide customized solutions and valuable human capital to keep your company running without increasing your ongoing overhead. From creating cash forecasts to providing credibility with banks and 3rd parties, a fractional CFO free’s up your time so you can focus on what you do best—growing the sales pipeline.
If you have any questions regarding our Fractional CFO services, please do not hesitate to contact us. We’re sure you’re familiar with the problem; every business, at some time and for a variety of reasons, has trouble or fails to collect their accounts receivable. One of the wisest sayings in business is that you haven’t really made a sale until you have the money in hand. So if having good sales practices is important for a company, having good credit and collection policies is even more important. The Perils of Uncollected Accounts Receivable In worst-case scenarios, unpaid accounts receivable can cripple or bring down a business. A much greater amount of new business must be generated to make up for the lost profits of an unpaid invoice. If the invoice is paid but late, the cash flow impact can be costly, eroding your profit margin. And remember, the longer an invoice goes unpaid, the harder it is to collect. You may not be able to escape the problem, but there are steps you can take to reduce losses from unpaid invoices. Interested in reading more from our Finance & Accounting experts on related topics? How to Proactively Reduce Losses from Unpaid Invoices The No. 1 factor in collecting accounts receivables is attitude. Businesses that are proud of the product or service they provide and simply expect their customers to live up to their end of the bargain and pay the invoices always get paid faster than businesses that consider slow paying customers a fact of life. 1. Exercise due diligence in obtaining new clients. Be aware of a prospect’s market conditions and of the payment policies of prospects. These days, it’s not uncommon for larger companies to have vendor payment periods longer than 60 days – in some cases much longer. Make sure you understand the cash flow implications of such extended pay customers. 2. Determine if you qualify for shorter payment terms. Some large companies have special shorter payment terms for “qualified” small businesses. 3. First do the things you control. Speed up your internal billing process. The quicker a customer receives an invoice, the quicker you get paid – no matter what the customer’s payment cycle is. 4. Bill in increments. Several small invoices or progress billings tend to be easier for customers to pay than one large billing at the end of the project. 5. Establish clear credit policies and adhere to them. Your customers should know and understand those policies as clearly as you do. Payment policies should be incorporated in sales contracts. That will not only help ensure the prospect is aware of the policies, but it will give you leverage should a collection action become necessary. Be consistent with payment policy enforcement. 6. Set the proper tone with a new customer. It is always harder to change bad habits once they go unchallenged for a period of time than to get started on the right track. 7. Consider sending invoices electronically. Sending invoices electronically can o avoid delivery delays, but make sure you have a clear delivery path that will enable your invoice to get past spam blockers and other filters. It is best to ask permission before emailing invoices. Some customers still consider this a hassle and tend to “lose” them. 8. Maintain good relations with clients. Build strong relationships with your clients, especially with people responsible for authorizing and issuing payments. If a client short on cash has to pick between two vendors to pay, you stand a better chance of being the one getting the money if you have maintained a strong relationship with the client. 9. Monitor your aging reports. Your accounting system should be able to generate daily accounts receivable aging reports, giving you information to initiate collection processes. 10. Make sure your invoices are correct. An incorrect invoice can sour a relationship and cost you time. 11. Establish a credit limit for each customer. Do not let an account build up to a level that it becomes an “impossible” burden for the customer to pay. Use your accounting software to flag orders that exceed the credit limit. If necessary, initiate semi-monthly payments to keep the balance within a reasonable range. 12. Maintain a credit file on all customers. Include trade and bank references as well as contact information. It is a red flag if a prospect is reluctant to provide trade and bank references. Keep a copy of a check that you receive from a new customer in the file. This way you have the bank and account number if you ever need to garnish their account. How to Reactively Reduce Losses from Uncollected Invoices 1. Communicate internally with the appropriate departments.
When an invoice passes the due date, your sales, service and delivery staff on that account should know, especially if your policies call for denial of delivery to clients with past-due invoices. 2. Make a copy of the invoice and circle the payment terms. A simple first step for a past due invoice is to make a copy, circle the date and your terms with a red marker and write PLEASE! across the face of the invoice and mail to the customer. 3. Get on the phone. A designated person, such as the bookkeeper, should inquire about the late payment in a respectful manner. There may be a good explanation for the late payment; starting off the phone conversation in a negative way might exacerbate the problem. If the customer relates a cash flow problem, consider offering some payment plan, whereby at least a portion of the bill is paid immediately. Try to get the customer to make some commitment even if small. Small steady progress is much better than no progress. 4. Sometimes old adages ring true—employ this one. “The squeaky wheel gets the oil.” 5. Record your steps. After the initial phone call, consider sending a letter to the customer, detailing what you verbally agreed upon. Include a copy of the invoice. Keep records of your attempts to collect unpaid invoices. 6. Introduce email into your collection efforts. It is often easier for a customer to respond to an email and easier for you to remind the customer of commitments and pressure the client to live up to promises. 7. Follow up. If the first phone call brought no results after your company’s designated time period, call again with a more stern inquiry. Make sure you get a renewed and specific payment agreement. If that call brings no results, a third phone call should be made in a polite but firm manner. This may be the time to note that your company turns unpaid invoices over to your attorney or collection agency, if you have such a policy. 8. Acknowledge payment. Call the customer when the invoice is paid and, if you determine the client is still valuable to your company, stress your desire for a continued relationship. 9. Cash on Delivery (COD) can be a good tool. COD + some amount can be a good tool if a customer needs continued product but is unable to pay the past due balance in full, e.g., COD + 10%. 10. Don’t be afraid to “cut off” a customer who is not paying. If a customer has not paid their invoice and is not responding to your requests for payment you should cut them off in order to maintain the health of your business. If you work on a 20% margin, it takes $10,000 of new sales to make up for a $2,000 write-off. The amount is much greater if you consider the cost of the aggravation of a bad account. 11. Proceed to collections. If your procedures fail, consider turning over the invoice to a collection agency or, if the amount is very large, to your attorney. Remember, the older it gets, the harder it is to collect. Lauber Business Partners can leverage our years of experience and advanced knowledge of Finance & Accounting requirements, practices and policies to help businesses unleash their full potential. Learn how your business could benefit from a Lauber Business Partner by contacting us today. For additional business tips read our Finance & Accounting Blog Series or review our recent case studies. When a business is forced to deal with rapidly changing conditions or an uncertain future, an “Interactive Financial Model” is an invaluable tool.
Think of it as a projection for your business, driven by key assumptions that can be easily changed. Use the power of Excel to recalculate a projection of future results based not only on historical trends but your best estimate of what will happen. What is the value of an Interactive Financial Model?
Key components of a financial model:
Establishing solid assumptions is a key to building a credible financial model. The more effort you put into your assumptions the more valuable your model will be.
Other assumptions required will vary by business but should include:
Laying this all out in an excel worksheet so that assumptions can be changed to show what happens under different scenarios will make this a powerful tool for managing the business and reacting to changing conditions. For an example of an Interactive Financial Model in Excel format click here. A key part of the financial plan process is to report actual results against that plan and to investigate deviations to determine if corrective action is required. It is beneficial to periodically update the plan to account for real-life changes in assumptions and business conditions. Consider saving a copy and updating it with actual results. Then reforecast the balance of the year so you always know what your year-end results will look like. Creating a model from scratch may seem like an overwhelming task. To begin to gain the value, start with a few basic assumptions and use historic average information for the rest. Each month as you review, you can replace some of the average information with more refined assumptions. |
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