Cash flow is a beautiful thing. When it's positive, it does so much for your business. Positive cash flow creates jobs, provides opportunity to purchase materials and equipment, and it allows companies to invest in R&D. Yet, cash flow has become an increasingly large pain point for many businesses lately due to the COVID-19 pandemic. And while there's no way to precisely predict when things will turn around, you can take proactive measures through cash flow forecasting. Today we're going to discuss what this is and how it can help your business weather this season.
What is Cash Flow Forecasting?
Cash flow forecasting is a financial planning tool that helps businesses plan for the future. With forecasting, you can identify potential cash shortfalls in advance, understand your budget process accurately to create a road map for the months ahead, prevent defaults on loans or payroll, and find accounting errors faster – and before they create unnecessary issues or challenges.
This process benefits the books by managing liquidity, and it's also good for the emotional state of its stakeholders. Forecasting prevents a scarcity mentality by bringing logic into decisions on the timing of business and capital expenditures. It helps decision-makers manage hiring on a more even keel, and its better overall for financial decision-making.
Right now, it's the number one financial tool businesses need during the COVID-19 pandemic. For those who received a SBA Paycheck Protection Program (PPP) loan, forecasting is the top decision-making tool you can use to determine what's next.
What Happens When Cash Flow is Out of Control?
In times like these, with so many challenges facing the energy industry, companies of all sizes are feeling the pressure. Your cash flow could feel like its gyrating out of control. It keeps you up at night, it leads to stress, feast-or-famine thinking, and it creates conflict amongst company stakeholders. Cash flow problems can impact your business, your relationships, and your emotional state.
Forecasting Reigns in Cash Flow Issues
Forecasting helps businesses reign in common cash flow challenges and confidently plan for the future. It helps you identify money coming into the business, and money going out. To map out a cash flow forecast plan, you need to gather information on the following:
Recurring expenses such as payroll and bank debits
Accounts payable data
Annual payment information
Any expenses that don't run through accounts payable.
Interest and loan payments
Planned Capex expenditures
Cash receipts from commercial banks, Bill.com, merchant accounts, etc.
Realistic projected sales
This is the information you'll need to build a cash flow forecast. Using this, calculate cash disbursements by adding up the recurring expenses, accounts payable, annual payments, loan payments, and planned expenditures. Next, calculate cash receipts, including accounts receivable and projected sales.
The total amount of cash coming in minus disbursements gives you a picture of your current position. But this is just the beginning. To forecast, you will want to project your sales pipeline, cash receipts and cash disbursements by week into the future. We recommend a 13-week cash flow project which is generally requested by lenders and private investors. The 13-week cash flow project can be further integrated into the company’s rolling forecast and long term financial models.
Once you have your forecast, you'll also need to set up cash flow/debt key performance indicators (KPIs). These should include information such as cash in the bank, cash conversion cycle, days sales outstanding, current ratio and quick ratios. You'll also need information on:
Operating cash flow
Debt to equity
Debt to total assets
These KPIs are metrics that you can put in place to monitor the strength of your cash position going forward. With a clear plan, clear picture of your current cash flow, and KPIs to track progress moving forward, you can make better business decisions with less stress moving forward.
Need Help with Cash Flow Forecasting?
The Healthcare CFO specializes in cash flow forecasting. We help you plan for it, decide how best to spend it, and even find new sources of it so that you can invest, grow, and accumulate more. Whether you want to use it to fund company growth, owner retirement, transfer it to the next generation to continue building your legacy, or all three, we'll help you with actionable cash insights for smarter decision making.
At The Healthcare CFO, we help physicians and healthcare business owners generate and manage financial momentum™. Call or email us today for an initial consultation.