How’s your cash flow planning?
We can probably all agree that the right moment to start systemic cash flow planning is not in the middle of an economic crisis, as it would have been better to start prior. However, now I say, “No time like the present!” or “Better late than never!” or “Do today what you would prefer to do tomorrow!” You get the point.
I’m so glad I’ve been able to help several clients improve their cash flow planning in “good times”. Sometimes that has involved simple planning for an operating checking account, and other times, it has involved a more comprehensive approach to cash flow planning including “P&L” forecasting.
I’m offering some ideas here to help, as many business owners and/or executives have cash flow on their minds. The following is a high level overview of the process I would encourage business leaders to take:
Evaluate “corporate will”:
Implementing cash flow planning is essential in my opinion for effective management of a business. However, the results will almost certainly, eventually result in certain surprises and will necessitate a call to action. Without “corporate will” to respond to the data presented, frankly it is a waste of time. When I am called to assist a company navigate through some hard decisions, I start most conversations with this topic. The phrase, “Don’t ask questions you don’t want to know the answers to” will not be helpful here. Be prepared to make the necessary decisions.
Understand financial position:
You need to understand what your liquidity and financial position is at any moment in time. How much is our days’ cash on hand? How much does it vary from day to day, week to week, month to month, season to season? Are we headed into a low period of cash flow? What is our ability to weather a storm or recession? What is our working capital? Has our working capital been trending up or down? I’ve had to tell several clients in my career that their working capital is trending downward and they have only a few months before working capital declines so much that it will be difficult to avoid bankruptcy. What are other key financing positions to monitor such as debt or lines of credit?
The nature of my work is such that I am usually building an understanding of a new client’s situation from the ground up. In these situations, I need to understand cash flow trends over the past months and years. This helps give an appreciation of an organization’s history, which will serve as a baseline for planning for the future.
Implement good modeling:
You can now begin to build your cash flow planning models. Decide the parameters. Do you need to do daily, weekly or monthly monitoring? Some of those decisions may change depending on the urgency of the situation, and it may change as situations arise.
Catalogue upcoming cash flows:
Using all historical and institutional knowledge, begin to quantify known cash flows. What are upcoming receipts going to be? What are upcoming disbursements? Examples likely include payroll, taxes, vendor payments, financing payments, such as debt payments, and other transactions, including capital expenditures, dividends and payments to owners. Pay attention to unusual non-recurring transactions and variances from the normal trends. Examples include those months where there are 3 pay periods instead of two, quarterly debt payments, annual vendor payments, reductions in expected cash receipts, etc.
Do the results make sense in relation to historical trends? Do they make sense in relation to known upcoming transactions?
Prepare to make decisions based on the data. How are your reserves? Again, a good question to ask is, “What is your ability to weather a storm?” Will it be measured in days, weeks, months or years?
Repeat and repeat:
Finally, plan to maintain a systemic review of this planning. If you are starting this cash flow planning in the middle of a crisis, I hope and pray that you get through it. If so, you will likely see the benefits of implementing a discipline of cash flow planning post-storm. The planning will result in good data, questions, conversations, and decisions that will help your business grow.
I know the process works in providing the data you need to run your business. I trust that this high-level summary is practical enough for you to kickstart a process that is meaningful for you. If you need help, I am happy to have a conversation with you.
W. Karl Baker, CPA, spends his time thinking about ways to help organizations with sound financial decisions, including improving revenue cycle management, and access to capital. Find more information at www.BakerCFOadvisory.com and www.InfinityCommCapital.com.
Karl spends his time thinking about ways to help organizations with sound financial decisions.
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