Create a financial plan that lets you control cash flow – instead of letting it control you.
For the coming year (as in any year) there are three critical questions your financial team should help you answer: How much cash are you going to need? When will you need it? And, how are you going to get it?
Answering these three questions is never easy, but thanks to enhancements of business budgeting software and the increasing sophistication of your financial professionals, achieving this essential task is within the grasp of most entrepreneurs willing to make the investment.
Entrepreneurs of serious growth companies know that it is possible to literally grow your company too fast, such that you outrun your available cash and loan resources. “Sustainable growth” is a calculation monitored by bankers and investors that tells how much a percentage growth in sales a company can sustain year-to-year without serious deterioration in cash balances, or without requiring massive equity capital infusions.
Savvy fleet managers know that, for example, a million dollar increase in sales in one year might bring $200,000 more to the bottom line in terms of book profits, but virtually zero cash to the table, after you consider the impacts of higher accounts receivable, inventory, and investment in equipment down payments and driver recruitment and training. So, working to “grow yourself some cash” can in fact have the opposite effect.
It is often surprising to me that relatively few companies really have a reliable cash flow forecasting software or system, one that helps them predict the profit & loss statement, the balance sheet, and the cash flow statement, on a rolling basis for 12 months, and then with comparisons to actual results. This is even more surprising when compared against the costs of running out of cash.
When setting your borrowing plans, any banker will tell you that you should ask for more than you think you need, because coming back with a request for more cash is far worse in the eyes of the loan committee, than asking for too much up front.