LGT's Profit Sense

Managing a business during the global pandemic without an effective cash flow forecast is very much like driving at night blindfolded. Likely, you’ll generally be moving in the right direction, but perhaps not for much longer on the road. Your business could be at risk from an oblivious, critical danger if not properly prepared and forecasted.

Cash is king!

The impact of COVID-19 on businesses has been considerable across industries and it has turned the notion of “business as usual” on its head. Many business owners have found that forecasting cash flow has helped them anticipate potential shortfalls and plan accordingly to cover difficult periods. Generally, when it comes to future expectations of their profit and loss, business owners tend to know their business like the back of their hands. They know what margin to expect from every product or service that the business offers and also have a clear understanding of operating expenses.

[Register for our upcoming webinars here!]

However, what business owners do not particularly know or anticipate is the “how” and “when” changes to revenue, cost of goods, and other general operational costs will affect their cash balance in the bank. Regardless of the impact of normal course of business…positive cash flow or negative cash flow… the phrase “Revenue is vanity, profit is sanity, and cash is king” indicates the importance and the value of cash flow forecasting. Cash flow is everything!

Cash flow forecasting, even during the pandemic, offers your business several advantages.

• It enables you to avoid making rash decisions and protects your business over the long run.
• You can make informed business decisions based on the timing of your cash flows and adjust your future working capital needs before you actually need the funds.
• You can determine what credit terms to offer to customers based on their payment history. As you identify and address late-paying customers, you can take action to obtain customer payments in a timely manner.

[Meet the leader of our Manufacturing and Distribution niche, Dawn.]

Some of the banking and financing benefits of cash flow forecasting include:

• Saving money over time by avoiding late fees and bank charges from overdrafts.
• Preserving your company’s good credit standing by reducing or eliminating late payments and overdue bills.
• Obtaining or increasing a line of credit before your business actually needs the funds to support operations. Remember that the best time to get a loan is when you don’t need one.
• Paying down high interest rate debt or investing excess cash to earn interest through vehicles such as liquid money market or sweep accounts.

There are many other benefits associated with cash flow forecast such as:

• Effective cash flow forecast leads to business growth. Business owners will need a strong cash flow analysis in order to compliment an increase in sales/revenue with related the purchase of inventory.
• Offering clarity on the future. By closely monitoring and learning from the trends resulting from prior years, such as accounts receivables turnover, inventory turnover, and other business expenses, business owners can anticipate and plan for the future.
• Confidence from owners, investors, and bankers due to transparency of the financials.
• Control of your business. ‘If you fail to plan then you are planning to fail’ – this phrase has never felt so relevant until now. With an effective cash flow planning strategy, the business owners are able to control their business related expenses, costs of goods, and further more.

Where to begin?

Performing cash flow forecasting is easier than you might expect. There are many software programs and tools available such as QuickBooks, Pulse, Dryrun, and Float, or you can even use a simple spreadsheet to track and plan cash flow. Cash flow tools can be linked to other business software such as the Hubdoc document storage program and apps such as Expensify and Bill.com.

[We offer a wide range of M&D specific accounting and advising services.]

Steps to follow to perform cash flow forecasting are straightforward:

• Start by determining the time period that best suits your business, such as weekly or monthly. This may depend on how often you bill customers, your payment terms, and how often you pay your company’s invoices.
• Begin with the cash balance held in the bank and add in anticipated cash receipts from customer payments, draws against your line of credit, cash credits, refunds, and other inflows.
• Subtract payments made for rent, credit cards, utilities, vendor payments, and other cash outflows.
• Your cash inflows should meet or exceed your cash payment requirements. If you foresee a shortfall, consider how you can address it by reducing expenses, pushing for faster customer payments, or drawing on your line of credit.
• Extend your forecast at least two to three months into the future to establish a rolling outlook for the quarter. Update your forecast monthly.

Businesses need to access all the planning tools in their arsenal during the pandemic. Cash flow forecasting enables you take a proactive stance and to better understand your future cash needs and potential spending gaps. Using cash flow forecasting will allow you to avoid surprises and make better business decisions.

Do you have questions on how your business can use cash flow forecasting?

We can help.