Projecting Cash Needs for Next Year

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. 

So how does one forecast cash balances routinely?  Your first choice is internal preparation vs. external outsourcing.  If your company has a Controller and an adequate accounting department, clearly that person should lead your cash forecasting function.  But if they are covered up in simple daily, weekly or monthly reporting and control tasks, you’ll need to invest in additional people in their department, such that time is opened up for this critical task. 

 

There is a good bit of software available on the market – but good forecasting is a much more sophisticated financial model than many people believe, so it is critical that you choose your planning tools carefully.  Simple spreadsheet-based programs often cannot forecast all three critical financials – the P&L, plus the Balance Sheet, plus a Cash Flow forecast.  Don’t waste your time trying to create one – I’ve done that – it takes far more time than you have available. 

 

External outsourcing of this function should also be considered.  Your CPA firm can provide this service (or refer you to someone who can) until your own people can take over the process after the initial startup, or after 6 to 12 months of refining the process.

 

One program I’ve used is “Up Your Cash Flow”, ( www.upyourcashflow.com) which goes beyond being a mere budgeting and forecasting software tool, and is classified as a tool for strategic analysis and business planning.  For example, this program allows forecasts by specific customer, plus other tools that break down your business into manageable segments.  This would be critical to do if you have five or ten really large customers, as many fleets have. 

  

Another feature I like is the “Trial Balance” beginning financials entry feature, which allows you to begin with last year’s balance sheet and P&L as a starting point for this year’s forecast.  Yet another is the “One Hour Forecast” which allows a quick start on forecasting after entering five or ten key variables.

 

Any good software you use should give you plenty of horsepower to quickly modify virtually any of your dozens of variables.  And when you do buy software, do plan on obtaining any available training courses.  And, as in any new process that has tremendous benefits – the investment of time and funds will have a return on investment commensurate with the cost.  Just ask anyone who’s run out of cash at the wrong time.