Cash Is King

One of the successes to weathering a financial crisis is having enough cash on hand to get you through the storm. Many business owners know well how to manufacture or distribute a widget, but fail in maintaining cash and staying on top of funding working capital. While traveling I will hear business owners say “my business is doing well, sales are up, but I do not have cash in the bank”. When asked if they prepare cash budget or cash forecast the topic of discussion changes quickly to the weather. Yes, the process of preparing the cash forecast takes time and might be painful, but the benefits of knowing how much cash you will have in the bank outweigh these costs.

What information do you need to do a 12 month cash forecast?

  1. A good estimate (forecast) of your sales by month—don’t beat yourself up—it’s an estimate and can be adjusted along the way.
  2. How long does it take your customers to pay you? If you give them terms, are they paying on time or paying beyond due date. You’ll need to calculate the number of days your receivables are outstanding—this will be used to determine when you receive your cash. If your terms are cash, then monthly cash collected equals your sales.
  3. A list of your expense accounts and monthly amounts paid, not an average—we’re tracking cash.
  4. The monthly payment amounts on your loans and long-term obligations.
  5. If you are taking distributions (S-Corp, LLC) –you’ll need this information, too.
  6. Timing of your material purchases (for manufacturing) or product purchases (for distribution or retail) is critical to the cash forecast.

The key to a successful cash forecast is accurately entering when the cash is received and when the cash is spent. And remember, it’s a process subject to many changes along the way.

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