Have 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.)
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Update Financials & Reports
Look at your financial statements regularly, and make sure they are updated – especially your Statement of Cash Flows, 13-Week Cash Flow Forecast, and Daily Cash Report. 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.
Communication is key to handling a cash flow crisis. Talk to your vendors about extending the payment schedule. Communicate with your banker that you don’t think you will meet your bank covenants. Coach your sales people to collect all outstanding sales.
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:
- 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.
- CAPEX acquisitions – you want to know how much actual cash you have to acquire CAPEX.
- Distributions/Bonuses, etc. – how much can you pay out?
- 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.
- 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:
- Estimated cash receipts
- Beginning cash balances
- Estimated payroll and taxes
- Estimated operating expenses/accounts payable
- Note/lease payments
- Payments on lines of credit or other debt
Tips 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.
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