Where is my cash?

We’ve all heard the saying, “Revenue is vanity, profit is sanity…but cash is king”. The overwhelming majority of business failures are a result of running out of cash. The overwhelming majority of extreme business owner stress comes from a shortage of cash. Cash is indeed the lifeblood of a business.

The great news is there is one straightforward technique that, if run properly in your business, will always help to even out the cash pressure and will always help to reduce your stress as a business owner. The weekly Cashflow Forecast.

However, before getting into the Cashflow Forecast that you should be running, I’ll quickly mention a couple of things that I am definitely NOT talking about here:

1. The first is your bank balance. Sounds odd, but your bank balance is absolutely useless as a management tool. It may tell you how much cash you have today but, if your business has a big tax bill due tomorrow, you could still be about to run out of cash. Your bank balance is simply the result of past activity and is no indicator of what’s going to happen in future. Too many people just look at their bank account to judge how they’re going in business….and inevitably end up regretting it!
2. The other things I’m not talking about here are the actions you can take to actually increase your cashflow. There are of course plenty of things you can do that can reduce or delay cash outflows (for example, all of the cost management strategies), and that increase or accelerate cash inflows (the majority of the 5-Ways strategies). Some of these should be in every 90-day plan you create; however they are not the focus of this blog.

What we are discussing here is incredibly fast to implement and always effective. In fact, the proper operation of a weekly cashflow forecast is among the most basic elements of financial mastery in any business. So what does it look like? Here are the key points;

The Cashflow Forecast itself is usually a fairly simple Excel spreadsheet, with three sections or worksheets. One lists your expected cash inflows, one your expected cash outflows and the other the combined effect of the two.

In Australia, as a result of the BAS/GST process, it is strongly recommended that your Cashflow Forecast looks forward by 3 months to accommodate the next BAS payment. Within that three months, it should be broken into weekly columns. The Cash Inflow section will simply identify your sources of cash (product line, division, individual customers, or whatever is appropriate to your business), what cash you expect to receive from them and when. Likewise, the Cash Outflow section will list your main uses of cash (different suppliers, expense items, taxes, etc), what cash you expect to pay to them and when. In both cases, you are forecasting the amount, and timing, of actual cash movement – not when an invoice is issued or received.

The Summary page pulls it all together: starting with your bank balance at the beginning of the period, then each week adding the cash inflows forecast for that week, subtracting the cash outflows forecast for that week and coming up with the predicted bank balance at the end of the week. The 12 weeks will then appear in a line graph, showing very clearly where you are expecting your cashflow to be each week for the next three months.

Each week the Cashflow Forecast should be updated; usually a simple task, given that most of what is in the Forecast remains the same from the previous week. You simply need to slide it all across by one week, add a new week at the end and make any adjustments based on changes to the Forecast that may have occurred in the week just passed. And remember, this is not an auditable document, now will it be submitted to the tax office. Don’t get hung up on needing absolute precision, nor certainly. It is a Forecast. It is simply your best estimate of what you think will happen over the next few months.

Whilst the first iteration may take a couple of hours to pull together, every week that passes, the process will become easier and faster. For most businesses, it can be updated in about half an hour each week. And the value of that half hour of work is immeasurable. In particular, that value accrues in two ways:

• The tangible benefit of this process is that you get visibility of any cash shortage very early on; in fact, three months in advance. In line with that, you have plenty of time to take action. To bring forward sales, accelerate cash collection, delay some expenses or even remove some expenses. More often than not, with clear planning and action, the cash shortage can then be avoided or minimised. Of course it also gives great visibility when your business is accumulating surplus cash, allowing you to make sensible investment decisions.
• The intangible benefit of confidence and reduced stress. Much stress and fear comes from the unknown…the what-if’s and worst cases that lurk in your mind. If you are seeing a clear forecast of cashflows every week and maintain this rhythm, you’ll always know where things are from a cash perspective. You’ll know either that the cash outlook is great for your business or, if it’s going to get tight, you’ll know when and to what extent in good time to do something about it.

I’ve been doing weekly cashflow forecasting (or at least someone in my business has been providing me with an weekly cashflow forecast) since 2006. Interestingly, it started then because I’d taken over a business that was on the verge of bankruptcy, so we had no choice but to be on top of the cashflow. Since then, it has become one of my favourite management tools. The clarity it gives me, the ability to plan that it supports and the confidence I get as a result are all invaluable. It is, in this way, the best management tool for a good night’s sleep!

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