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How To Know If Your Company Is About To Run Out Of Cash

A Businesses Worst Nightmare

According to Small Business Trends, 82% of businesses that fail, claim it is due to insufficient cash flow. With such a high percentage of business failures due to this issue, it is pretty apparent that as business owners, we must get this right. The easiest way to see what direction your business is heading in, is to prepare a Cash Flow Forecast.

Preparing a Cash Flow Forecast

We recommend preparing a 3-month forecast, with the first month being detailed by the day. We believe this is the amount of time needed to make adjustments, if there is to be a cash deficit. To begin, we start with a beginning cash balance and then summarize the key sources and uses of cash. Common key sources and uses are outlined below:

Sources of Cash

  • Accounts receivable

  • Collections for future sales

  • Debt or equity financing

Uses of Cash

  • Cost of Goods Sold

  • Overhead (payroll, rent, utilities)

  • Accounts payable at the time of the forecast (bills)

  • Marketing & Sales expenses


Constructing the Forecast

There are many variations on how to construct and design your cash flow forecast. You simply want a model that is easy to read, and one that will show when you might incur a cash shortage. Still Water Financial Operations has designed this easy to use excel model to show you the basis. Click here to download.

Assumptions to be Aware of

Like all financial models, the cash flow forecast is only as good as the data you have entered. Several areas we see clients struggling with are:

  • Overly optimistic sales forecast

  • Overly optimistic collections on accounts receivables

  • Large one time costs that become recurring

  • Not accounting for commissions or royalties that accrue

It is always best practice to underestimate income and overestimate expenses. If not, you run the risk of a cash shortage.

Conclusion

Of course these cash flow forecasts are just that, a forecast. It is an estimate of future cash flows. There will be items you miss, but the point is to consistently monitor your businesses cash position on a daily and weekly basis. By staying on top of your cash position, you can make adjustments ahead of time. Gone are the days where you stress over payroll each week or crippling expenses coming up, you are now equipped with the knowledge to foresee these troubles in advance and adjust accordingly.

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