Tag Archives | cash flow

Daily Cash Flow Forecast

See Also:
Cash Flow Statement
Steps to Track Money In and Out of a Company
How to Create Cash Flow Projections
Thirteen Week Cash Flow Report

Daily Cash Flow Forecast

Use the Daily Cash  Flow Report to report on the daily cash balance and to help manage cash on a weekly basis. This tool is especially useful when entering a situation where active cash management is required for your daily cash flow. The daily cash flow report template is used best as a tactical, active cash management tool. Knowing your daily cash position as well as your weekly cash commitments gives you added impetus to collect money and/or to generate revenues. You can then take the information generated in the daily cash flow report and incorporate the information into another useful tool, the Flash Report!

Why use a daily cash report? When facing a cash crunch, CFO/Controllers often manage cash by reviewing the online bank balance. Though easy to do, this number is not accurate. It does not take into consideration outstanding checks. Another symptom of a cash crunch is that accounting falls behind in processing information. By preparing this daily cash flow forecast or projection you force the accounting department to stay current with posting transactions.


NOTE: Want the 25 Ways To Improve Cash Flow? It gives you tips that you can take to manage and improve your company’s cash flow in 24 hours! Get it here!

Download The 25 Ways to Improve Cash Flow


Use in Conjunction With the 13-Week Cash Flow Report

This tool is also helpful when used in conjunction with the Thirteen Week Cash Flow Projection. It is helpful to think of the 13-Week Cash Flow Report as giving you the strategic big picture needs, while the Daily Cash Flow Report provides a more tactical level measure of your firm’s cash position. You can tie a week’s worth of cash receipts and cash disbursements as reported in the Daily Cash Report to the 13- Week Cash Flow Report.

Update the Daily Cash Report daily; remember, this process should not take more than thirty minutes to prepare. However, there is some element of planning involved insofar as weekly cash commitments are concerned. If the company is in a severe cash crunch, you may need to negotiate with vendors about partial payments.

The Daily Cash Report format should be set up and managed by the CFO/controller. However, it can be outsourced to a staff member in accounting to keep up on a daily basis. There are 3 sections to the Daily Cash Report: Today’s Cash Position, Weekly Cash Position and Payables Detail.

Prepare the daily cash flow report in the morning of each workday. Use the information on the report to help you manage cash for the day that you prepare it.

Note: Today’s Cash Position is really the ending cash position from yesterday.

Daily Cash Position

This purpose of this section is to give you the cash position at the start of the day as per the G/L balance. The cash position for the start of today is the same as the ending cash balance from the last business day. Hence, the report you update and start off with at the beginning of today will be on the information from the last business day. (Reminder: this report is prepared the following day of the reporting period.)

Starting Balance

If the report you are preparing for today is based on information from the last business day, then it is important to capture all the cash flow events that happened during the course of the last business day. To do so, we need to have several anchors. First, you need a starting balance. This starting balance is the beginning cash balance per G/L and any outstanding checks from last business day (usually yesterday). This beginning cash balance is the same as the ending cash balance from two business days ago. Both the cash balance and outstanding check balance should be summed together to a Reconciled Balance. Click here for more information on account reconciliation.

Cash Inflows

After obtaining the starting balance for the last business day, we need to capture cash inflows. Examples of cash inflows include cash payments, lockbox payments, credit card payments, and any checks received through the mail. Again, these cash inflows and deposits are from the last business day. Add up the total amount of cash inflows together to obtain the Total Deposits.

Managing your cash flow is vital to a business’s health. If you haven’t been paying attention to your cash flow, access the free 25 Ways to Improve Cash Flow whitepaper to learn how to can stay cash flow positive in tight economies. Click here to access your free guide!

Cash Disbursements

The third piece of financial information you need to obtain is information on cash disbursements from the last business day. Cash disbursements include payroll checks, A/P checks. Your firm may prefer to have a separate line item for certain significant cash disbursements. As long as you keep the overall report simple and uncluttered, this is fine. After all cash disbursements have been accounted for, sum up together to obtain Total Disbursements. Enter the cash disbursements as negative numbers. The report is intended for non-accountants who think in terms of expenses being negative.

Sum up all of these elements together to obtain the ending cash balance for the last business day:

Reconciled Balance + Total Deposits – Total Disbursements = Cash Balance.

Incoming monies from yesterday Disbursements (Insert Date from 1 business day ago)- Payroll Fees – AP Checks – Other Disbursements = Total Disbursements

ENDING CASH BALANCE AS OF : This is also the Beginning Cash Balance for TODAY. Reconciled Balance + Total Deposits – Total Disbursements.

Weekly Cash Position

The weekly cash position gives management an estimate of how much incoming cash and cash disbursements the company expects to have for the entire week. Remember, this is an estimate only. Update this estimate periodically so that the company improves on the estimate. Your company may prefer to have a separate line item for certain significant cash disbursements. This is acceptable as long as you keep the overall report as simple as possible.

A template follows as below:

Estimated Deposits for the week ending: Lockbox/Mail + Credit Cards = Total Estimated Deposits

Estimated Disbursements for the week ending: Hourly Payroll + Salary Payroll + A/P Checks Committed + A/P Checks Expenses = Total Estimated Disbursements

Managing Payables

The CFO/controller will need to list the different vendor/suppliers that the company intends to pay for the week. During times of extreme cash shortage, it may be helpful to make a note of which vendor/suppliers are of high priority.

Update daily. However at the beginning of the week, plan to give extra attention to prioritize which vendors should be paid. Depending on the cash situation of the company, try to think of paying only a portion of what’s owed.

List of the vendor/suppliers with the amount needed to be paid. Finally, sum up the total amount. Vendor A + Vendor B + Vendor C = TOTAL

Monitor & Review

Monitor and review the Daily Cash Flow Report on a daily basis in situations where cash management is big key part of company survival. A key part to focus on is the estimate of weekly cash deposits. Monitoring and reviewing the cash deposits will improve the accuracy of the estimates. For more ways to improve your cash flow like this one, download the free 25 Ways to Improve Cash Flow whitepaper.

Daily Cash Flow forecast
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Daily Cash Flow forecast

Originally published by Jim Wilkinson on July 23, 2013.

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Why You Need to Have a 13-Week Cash Flow Report

Why You Need to Have a 13-Week Cash Flow ReportHave you ever been in a cash flow crisis?

You aren’t able to make payroll.

You can’t pay your vendors.

There is simply not enough cash.

BUT sales are rocketing.

So in theory, there should be enough cash… Wrong.

I say this during every Office Hours I host for our SCFO Lab members… “You need to have a 13-Week Cash Flow Report. If you don’t have one, get one.” As we are quickly coming into the holidays and the new year, let’s look at why you need to have a 13-Week Cash Flow Report.

Or, do you live in a company that is cash rich, and you simply do not see the need to forecast cash because you know you have plenty in the bank?  Well, you still need a cash flow forecast.

Handling a Cash Flow Crisis?

Handling a cash flow crisis is never easy because it puts financial leaders in a difficult place. It may look like asking vendors to extend their payment terms, selling off assets, or laying off employees.

Whether your cash flow crisis resulted from the fluctuating market or mismanagement, there are a couple of tips in handling a cash flow crisis.

(NOTE: Regardless of whether cash is tight or flush, every company should have a 13-Week Cash Flow Report. In the SCFO Lab, members have access to our 13-Week Cash Flow Report template that we use with all our clients. Click here to view.)


Every company needs cash. That’s why you need to have a 13-Week Cash Flow Report! Learn 25 different ways to improve your cash flow with our free whitepaper. 

Click here to Download the 25 Ways to Improve Cash Flow


Update Financials & Reports

Look at your financial statements regularly, and make sure they are updated – especially your…

You cannot make smart and strategic decisions without the most up-to-date facts.  Having an updated cash flow forecast for your business that is updated weekly allows you to have a true pulse on the business. Your accounting records should be based on accrual based accounting. But your cash flow forecast ties in nicely as a great tool.

Communicate Effectively

Communication is key to handling a cash flow crisis. This could look like…

Why You Need to Have a 13-Week Cash Flow Report

The #1 reason why you need to have a 13-Week Cash Flow Report is because it’s active cash management. This report is a big picture tool that tells companies how much cash is required on a forward rolling basis. More specifically, it gives you the freedom to make big decisions.

Cash Rich or Cash Poor – You Need a Cash Flow Forecast

So, we briefly discussed that in a cash flow crisis the cash flow forecast allows you to manage cash and adjust payments to vendors while making payroll and keeping the lights on. What about in a cash rich company?

I recently started on a client, and the company is a cash rich company. The CFO was surprised when I mentioned to him that he should have a cash flow forecast.

Here are a few reasons why a cash rich company would want to know exactly how rich they are:

  1. If you are cash rich, then you may be looking at acquisitions. It would be nice to know who much you pay as cash and how much you finance.
  2. CAPEX acquisitions – you want to know how much actual cash you have to acquire CAPEX.
  3. Distributions/Bonuses, etc. – how much can you pay out?
  4. Plan for the worst –  I do not care what industry what you are in; they all eventually have downturns. Plan ahead and save up for those rainy days.
  5. If you are cash rich, then that means you made a large profit. That also means you have to probably pay taxes, or distribute cash to pay taxes. How much cash for taxes do you need?

How to Create a 13-Week Cash Flow Report

Now, let’s look at how to create a 13-Week Cash Flow Report.

There are several pieces of information that you need to gather as you build this report, including the following:

Why You Need to Have a 13-Week Cash Flow ReportTips on Making Your Cash Flow Report Successful

Here are a couple of tips on making your cash flow report successful.

Get C-Level Support

If your C-level is not supportive of creating the 13-Week Cash Flow Report or using it as they run the business, then it’s just going to be another report that never gets used.

Don’t let it become that!

This tool is so valuable AND every company should be using one.

Not using a 13-Week Cash Flow Forecast is like deciding not to drink water for an extended time. You know you need to water/cash, but you do nothing about it. Eventually, you become so illiquid that you are financially distressed, if not bankrupt.

For example, we once put together a 13-Week Cash Flow Forecast for a company that was making a small percentage of what they used to make when the market was better. We predicted that if they did not take any action, then they would be out of cash within 9 months. Unfortunately, the CEO and senior leadership did not make any changes and had to shut their doors. Our long term cash flow forecast was accurate and we warned the CEO.

Use The Report As A Playbook

The report is useless unless you actually use it as a playbook and use it to make strategic decisions. When you use the report as a playbook, you go from being an accounting/finance professional that knows how to build reports to a financial leader that strategically directs the firm.

How to Use a 13-Week Cash Flow Report

Once you have created the 13-Week Cash Flow Forecast, it’s important to maintain it. We suggest to maintain and update it at least weekly. We also suggest that you use this report in conjunction with the Daily Cash Report.

If you want to increase cash flow, then click here to access our 25 Ways to Improve Cash Flow whitepaper.

Why You Need to Have a 13-Week Cash Flow Report

Strategic CFO Lab Member Extra

Access your Cash Flow Tuneup Execution Plan in SCFO Lab. This tool enables you to quantify the cash unlocked in your company.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Why You Need to Have a 13-Week Cash Flow Report

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Strategy for Managing Cash

managing cash

Does your company have a strategy for managing cash

Many companies have established procedures for purchasing materials, collecting customer payments, and paying vendors.

But often people either do not communicate these procedures or simply don’t follow them consistently.

Even when everyone is aware of and follows the established protocol, your system may be flawed. Before we show an example, you need to know how to manage cash flow

Know How to Manage Cash Flow

We all know that cash is king – liquidity is essential for survival. Many entrepreneurs only know how much is in the bank, but they don’t understand how much cash they actually have. So, how does one manage cash flow?

First, you need tools. 

Here are a few tools that can help a company manage cash flow:


Download eBook 28 Ways to Improve Your Business's Cash Flow


Manage and Work Your Operating Cycle

Then you need to manage and work your operating cycle. Your operating cycle is “how many days it takes to turn purchases of inventory into cash receipts from its eventual sale”. It indicates true liquidity – how quickly you can turn your assets into cash. Calculate how long your operating cycle is using the following formula:

Operating cycle = DIO + DSO – DPO

Watch Your Expenses

Watch your expenses carefully. If you do not have an eye on SG&A and procedures on what can be purchased, then you risk racking up unnecessary overhead. Think about too much inventory, unnecessary equipment replacements, extreme marketing budgets, etc. 

Use Cash Wisely

Use your cash wisely. Always be thinking about will this add value to my company? when spending your valuable cash. If you will not see a return on your investment, then consider spending the cash elsewhere. 

Collect Quicker

Another method to manage (and improve) cash flow is to collect quicker. This is a great method to use if you are in a cash crunch and can only make small improvements. For example, there is a $10 million company that collected their accounts receivable every 365 days. They had a lot of cash tied up. If they improved their DSO 5 days, that would be an extra $137,000 of free cash flow

Example of Strategy for Managing Cash

Let’s look at an example of a strategy for managing cash flow. Imagine that Company A has 120 days of inventory on hand. They collect receivables in 60 days. And they pay payables within 30 days.  Even assuming that this is their established cash management strategy and everyone follows it, Company A will still find itself in a cash crunch. This is because of the disparity of time that cash is tied up in inventory and receivables versus the speed with which it pays its payables.

So what can Company A do to free up cash?  Here’s a link to an article that talks about how to develop a strategy for managing cash and techniques to improve cash flow.

Strategy for Managing Cash, How to Manage Cash Flow


Originally posted by Lisa Knight on February 19, 2015. 

Strategy for Managing Cash, How to Manage Cash Flow

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Alternative Forms of Financing

Alternative Forms of Financing, Alternative FinancingIt happens all the time. Companies need capital, but they aren’t bankable. Banks or other financial institutions will not touch them because they are either too risky, not able to meet covenants, or it just doesn’t work out for some reason. So, where do those companies go? They need to look at alternative forms of financing. In this week’s blog, we take a look at alternative financing and why there is a need for it.

What is Alternative Finance?

What is alternative finance? The US Small Business Administration defines it as “financing from external sources other than banks or stock and bond markets”. It typically refers to fundraising through online platforms; however there are various sources that could be considered alternative forms of financing. We will look into those a little later in this blog.

Sometimes, the best way to add value in a company is to know where to go for cash. If you want to learn 5 other ways a CFO can add real value, then click here to download our 5 Ways a CFO Adds Value whitepaper.

The Need for Alternative Financing

Why is there a need for alternative financing? Not all entities (banks, stock, bond markets, etc.) are willing to finance certain companies due to a variety of reasons. For example, Company A is a 2 year old company that has a technology that will not be ready for market for another 6 years. A bank most likely will not fund that project because there is no revenue for 8 years and there is no guarantee that the company is ever going to be successful. Alternative forms of financing will help Company A continue to research and develop their product and bring it to market.

In addition, alternative financing often provides benefits like mentorship, customer validation, advice, and buy-in.

Alternative Forms of Financing

There are several alternative forms of financing, but today, we will look at 5 financing options for companies that are not bankable. Those include crowdfunding, grants, mezzanine lending, private equity, and bootstrapping/sweat equity.

Crowdfunding

Crowdfunding is the most public form of alternative financing. It’s simply an online platform where many investors invest small amounts in a company. Popular crowdfunding sites include Kickstarter, Indiegogo, and GoFundMe. This is a great option for companies that have customers who want what they have but the bank does not agree. For example, some indie films have raised capital via crowdfunding platforms as both a marketing effort and capital raising. As a result of investor’s donations, they get perks such as rewards, early access, etc.

Grants

Other alternative forms of financing include grants, competitions, and accelerators. Grants do not have to be paid back, unlike a loan. They are usually disbursed or gifted by one entity. Often, that entity is a government department. It could also be a corporation, trust, or foundation. Most grants require an extensive application process. In addition, most grants are designated for a specific purpose – like research and development.

Grants, competitions, and accelerators often require business plans, financials, projections, etc. A benefit of going this route is to continually improve the business and add value. If you want to learn 5 other ways a CFO can add real value, then click here to download our 5 Ways a CFO Adds Value whitepaper.

Alternative Forms of Financing, Alternative Financing

Mezzanine Lenders

Mezzanine Lenders are organizations that provide loans to businesses; however, they are not required to have all of the guarantees and collateral of a traditional bank. Their loan to you might have some aspects of convertible debt to equity. In addition, it will definitely be more expensive than a traditional commercial loan. It will be about as expensive as using a credit card. But these lenders are great alternative to companies that may not be bankable.

Private Equity

Private Equity firms are funds, and team of individuals manages this fund that provides debt and equity to businesses. Usually, the “hold” period for the investment can be anywhere from 3-7 years. The Private Equity (“P.E”) firms bring best practices and find synergies with other portfolio companies to streamline costs. P.E. firms sometimes specialize in an industry or market to align their interests. Depending on the type of firm, private equity investors may take a managing role in a company.

Bootstrapping/Sweat Equity

While bootstrapping is not necessarily a form of financing, it does free up cash that is needed elsewhere. For example, a company can bootstrap by hiring employees on equity rather than a salary. While this may be a cheap option in the meantime, it can become expensive in the long run (especially if the company takes off).

It’s a CFO’s role to improve profits and cash flow. But to do that, they need to have the financial leadership skills to guide the CEO as they manage the organization. If you are ready to add real value to your company and get the respect you deserve, then click here to download our 5 Ways a CFO Adds Value whitepaper.

Alternative Forms of Financing, Alternative Financing
Alternative Forms of Financing, Alternative Financing

 

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Problems When Experiencing Business Growth

Problems When Experiencing Business GrowthGrowth is great for companies, right? Not always. There are so many problems when experiencing business growth that can occur if the leadership is not careful. Besides the uncertainty of how long this growth period will last and how big the company will grow, companies loose focus on some basic key factors. This can include not managing working capital, hiring the right employees, not scaling effectively, customer service, and having less efficient operations.

What Happens To Growing Companies

What happens to growing companies? It all revolves around sales. The sales team and CEO are so excited about all the additional new sales and customers. Unfortunately, some of the day-to-day items fall through the cracks. This includes cash management, internal processes, management/leadership, and systems. But growth can be managed if financial leadership is looking far enough ahead and close enough in. Growing companies don’t always land into sticky situations, but there are some issues that need to be addressed.

Problems When Experiencing Business Growth

Cash Poor

Cash is king. Growth usually comes at the price of consuming cash… Buying more inventory to meet the sales, hiring more people and increasing SG&A. I say that in almost every single blog I post because I cannot emphasize it enough. The #1 thing business growth does is make companies cash poor. The management and forecasting of working capital is critical in a high growth situation. Before you know it, vendors are collecting their accounts receivable yet you have not collected your A/RInventory is consuming cash in order to meet sales. It’s a recipe for disaster!

Need help managing your cash? Inside our SCFO Lab contains 13-Week Cash Flow Reports, Dynamic Cash Flow Projections, Cash Flow Tune-Up Tool, Daily Cash Report, and the A/R Optimizer. Click here to learn how you can access all of that and so much more.

Inefficiencies in Operations

Another thing that happens to growing companies is the increase of inefficiencies in operations. The goal is to push out as much product as possible, but oftentimes to do that, corners get cut. Product quality decreases. And customers are not happy. It also may be the inconsistency between products and/or services as there are no standard operating procedures (SOPs) written down.  If you customers get hurt by a decline in quality or service, then you may have some permanent damage. In addition, companies may have an influx of new employees that are not being trained effectively and/or at all.

Management Mistakes

While management mistakes covers a variety of potential issues, let’s look at two. One of the biggest mistakes is not taking care of the employees. Management is scrambling to scale-up to push product out the door and to continue bringing in the sales. But when stress is high and people aren’t being taken care of, you risk increasing employee turnover. This also includes knowing when to bring on new talent. If management is not continually recruiting and looking for new talent to help even the load off of current employees, then you risk further increasing employee turnover. Remember, the cost of employee turnover is on average $65,000 in the U.S.A. according to some studies.

The second biggest mistake is letting inefficiencies run high. At some point, there has to be a stop to letting inefficiencies continue. Financial leadership should be working with other departments to find better solutions that will deliver the same results. Your basic dashboards are very critical in a high growth situation.

If there are no other solutions, then you need to focus on the customers you have now versus continuing to grow.

Not Scaling

Another problem that occurs during a high growth period includes not scaling up. Are you getting the systems you need to run your business effectively? For example, a company is using a customer relationship management (CRM) system like Zoho or Bitrix – designed for small companies. However, this company triples overnight. They have outgrown their current CRM system. Instead of choosing a system that was for where they were at, they should have forecasted where they thought they were going and on-boarded a system that was maybe a little bigger for them to grow into.

Problems When Experiencing Business Growth

Some of the problems when experiencing business growth include the following:

The best way to address problems when experiencing business growth is to first look internally. Access our Internal Analysis whitepaper to analyze your company’s strengths and weaknesses.

Case Study

Let’s look at a case study about a company I worked with recently. They are manufacturer of industrial parts and had experienced growth for $20 million in revenue to nearly $100 mm in revenue in just three years. The company had a basic accounting staff but no financial professional on staff. Why? Because according to the owners, they are too expensive. The company quickly outgrew their accounting system. In addition, they purchased raw materials aggressively. The sales guys were living the dream with non-stop sales orders. They literally could not keep up with all the new sales orders. The manufacturing facility was now on three shifts to cover all orders. The company also did not want to spend the money on a second plant supervisor.

What were the results? It created a high stress environment. Cash became very tight and sales were being generated, but the order to cash cycle increased to almost 100 days. In addition, the quality of the products suffered because there was not proper supervision for the second and third shift. The accounting records were also not correct and reliable. Instead of the records being generated for large accruals and proper costing of products, they were generated by a basic accounting staff who were no equipped. Furthermore, margins were not reliable for management to use. Cash got tight quickly. The line of credit was maximized very quickly. When the lender challenged the compliance certificates and the financial statements, the ownership started to get concerned about the “back office”.

This financial distress and stressed out employees/ownership could have all been avoided with proper planning and forecasting.

Navigating Business Growth

When navigating business growth, it is important to know both your strengths and weaknesses. Ignorance to those two things risk inviting for unoptimized strengths and weaknesses that turn into major threats. Access our free Internal Analysis whitepaper to assist your leadership decisions and create the roadmap for your company’s success.

Problems When Experiencing Business Growth, Navigating Business Growth

Problems When Experiencing Business Growth, Navigating Business Growth

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Free Cash Flow Definition

See also:
Discounted Cash Flow Analysis
Valuation Methods
Free Cash Flow Analysis

Free Cash Flow Definition

The business is like a human body, the body needs blood, the business needs cash. Investor look at Free Cash Flow to make their decision for investment. Interestingly, it’s not a number you can come up easily. First, let’s look at the free cash flow definition. Many business owners, somehow, are not familiar with Free Cash Flow. The Free Cash Flow definition is cash generated by the company after deducting capital expenditures from its operating cash flow the amount of. In other words, after the company pays for employees, debts, expense, fixed assets, rent, plant, etc., whatever money you have got left (“left-over money“) is called Free Cash Flow.

FCF Example

For example, a company has $1 million cash flow from operating activities in its financial statement. However, they are spending more than $900,000 on purchasing property plants or replacing equipment. In this case, the investor will have to analyze the business to see if it was either a poor management decision or a high growth opportunity (i.e. more investment than cash on hand).

Even when a company makes positive Net Earnings, it doesn’t necessarily mean that company has Free Cash Flow.


If you want to improve your company’s cash flow, we have put together the 25 Ways To Improve Cash Flow (which you can access for free).

Click here to Download the 25 Ways to Improve Cash Flow


Why is Free Cash Flow Important?

As it mentioned above, cash keeps the business running. If your company has Free Cash Flow, then what should the company be spending the money on? They could either hire more employees, invest in other assets, issue dividends, or make more acquisition. Before you make the decision, there are 3 main reasons you would consider FCF as a competitive advantage to maintain the business growth rate.

Free Cash Flow to Equity (FCFE)

FCFE measures the Equity value, referred as “levered” cash flow. It’s the amount of money available for equity shareholders after paying all expenses, debts, reinvestment. Also, consider free cash flow to equity as an adjustment for debt cash flow.

Free Cash Flow to Firm (FCFF)

FCFF measures the enterprise value, referred to as “unlevered” cash flow. Free cash flow to firm shows available cash to all investor – both debt and equity. In an Unlevered Discounted Cash Flow analysis, you would use WACC (Weighted Average Cost of Capital).

Valuation using Free Cash Flow

Other than using DCF method (Discounted Cash Flow), use Free Cash Flow to estimate the present value of a business.

FCF = Present Value.

By calculating free cash flow, you can interpret discretionary cash flow of the company. If FCF is positive, then the company has many options where to put the money in. Whereas if FCF is negative, then you have to analyze if it’s a one-time issue or a recurring problem. If it’s constantly negative, then the company has to raise more money (debt or equity) or eventually has to restructure itself.

Free Cash Flow Formula

The free cash flow formula is very simple. Look at the Cash Flow Statement. Subtract Capital Expenditures from Operating Cash Flow.

Free Cash Flow = Cash Flow from Operation – Capital Expenditures

Operating Cash Flow

Operating cash flow is the amount of money required to fund a company’s normal operation. It’s usually in bold and always show before Financing and Investing Cash Flow. You can also refer to Operating Cash Flow as “Working Capital“.

 Capital Expenditures (CAPEX)

Find Capital Expenditures (CAPEX) in the Cash Flow Statement, under Cash Flow from Investing Activities. However, Capital Expenditures is sometimes listed as Purchase of Property & Equipment. Capital Expenditure is different from Operating Expense (OpEx).

If you want to increase cash flow, then click here to access our 25 Ways to Improve Cash Flow whitepaper.

free cash flow definition, Free Cash Flow Formula
Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

free cash flow definition, Free Cash Flow Formula

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Why Use a 13-Week Cash Flow Report as a Management Tool?

Why use a 13-Week Cash Flow Report as a management tool? Cash is king! This applies to any and all companies. No matter the size or industry, cash and cash flow are critical to any operation. Yes, some companies have access to lines of credit and other forms of financing, but that is debt that must be repaid at some point.

So if cash is so important, then why do not all companies use a rolling 13-week cash flow forecast?  We have had many clients over the years. And some, but not all, use a 13-week cash flow report as a management tool that is updated every week. Once the process is started, it is actually a fairly easy tool to keep updated.

Cash is critical to a company’s success. Click here to access our 25 Ways to Improve Cash Flow whitepaper and start improving cash flow today.

Establish a 13-Week Cash Flow Report

The first thing we do with every client is to make sure they establish a 13-week cash flow forecast if they do not already have one. And usually, the first thing we are told by someone at the client office is “our business is special, forecasting when we collect cash is almost impossible to predict”. I hear this way to often and you know, we have never failed at implementing a 13 week cash flow forecast.

13-Week Cash Flow Report as a Management ToolThe Purpose of the 13-Week Cash Flow Report as a Management Tool

The 13-week cash flow report is not meant to me an exact measure of what cash balance will be at the end of every week. On the contrary, it is a forecast. That means the actual results will be different from your forecast, especially in the later weeks. But what the cash flow forecast does tell you is your trend for ending cash balances. It actually does give you an estimate of what your cash balances will be. It is true that weeks 1,2 and 3 forecast are more accurate than weeks 11, 12 and 13.  But it does not take away that it provides some visibility as to where cash will end up.

The 13-week cash flow forecast is useful to a company that is financial distress and to a company that is flush with cash. That is because a company that is in financial distress must be able to determine what costs they need to cut in order to achieve a cash neutral position. A company that is cash rich, needs to know how flush they will be with cash to project things like capital expenditures or shareholder distributions. Either way, the company must have an idea of where they will be over the next 13 weeks. Why 13 weeks? Because that captures an entire 3 months, one full quarter. Being able to have an idea of where you want from a cash position in the next 3 months allows time for planning and decision making.

Do you need help putting together your 13-week cash flow report? Access our template and how to use it (and so much more) in our SCFO Lab. Learn more about the SCFO Lab here.

Cash Collections

It is interesting how many times we have implemented a 13 week cash flow forecast, then we look into why the cash actually collected is way off in weeks 1,2 and 3. Then we dig and find out that the actual cash collection process is poor or non-existent.

Case Study

I was part of a Chapter 11 bankruptcy process a couple years ago. The first thing we did was implement a 13 week cash flow forecast. This is something any CRO would do. When asked about cash collections, the CEO told me that the sales team (7 people) handle collections with their respective client relationships. When we were way off on week 1 and 2, I asked the sales people why we are off?  What are they doing to follow up on late accounts receivable (A/R)?  The response from everyone on the sales team was that they do not handle calling to collect invoices and outstanding A/R.  They stated that the accountant makes those calls and follows up with old A/R.  When I asked the accountant, she said the sales guys collect old A/R.

No one was following up with collections of old A/R. I initiated a daily phone call with all the sales people and assigned clients to call on and follow up on old A/R. We started with daily calls. And we saw some progress, then we went to every other day, then weekly calls. Over then next 5 weeks the company collected $2.7 of $3.2 million dollars in old AR.

So How Do You Start Using a 13-Week Cash Flow Report?

Week 1,2,3….13

Create a template that has a direct method cash flow statement.

Cash In –         Cash from accounts receivable

Then list cash from work not invoiced yet (this would be in the outer weeks)

Cash Out–       Major lines of operating expenses

Payroll

Other

On a weekly basis, pull A/R and A/P from your accounting system. Then link the individual items to the line items in the cash flow forecast. Don’t forget payroll totals.

Include a section below operations for CAPEX activities and another section for Financing Activities.

End cash balance by week

Cumulative cash balances by week

Have one person in your accounting department responsible for updating the 13-week cash flow forecast weekly. Make sure you have a dedicated person/people follow up on collections.  Compare the forecast for each week to the actual cash collections and cash payments – note variances. Then adjust how you forecast.

It is that simple! This tool will buy you peace of mind and allow you to have insight on your cash trends. You need to know this no matter the size of your company or your industry. Do not get frustrated; your first 3-4 weeks are a learning process. Your forecast WILL be off. Make adjustments and understand your variances. Before you know it, you will have a good feel for what your cash trends are. If you are strapped for cash now, click here to access our 25 Ways to Improve Cash Flow whitepaper. Make a big impact on your company today with this simple checklist.

13-Week Cash Flow Report as a Management Tool
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