Author: Mark Maurer Date: 03/21/2018

How – and Why – to Produce a Dependable Cash Flow Projection

Anyone who has worked with businesses understands that “cash is king,” and paying attention to the monthly cash inflows and outflows is essential to survival. Even the most conservatively managed business can find itself in a situation where it cannot meet its short-term cash requirements. One of the best ways to avoid the surprise of a cash deficiency is to prepare a short-term cash flow projection that’s updated regularly to identify and address painful cash gaps before they occur.

This document should be reviewed with your banker to discuss options (such as a line of credit) to address the periodic cash shortages. And, when meeting with your banker, you’ll also want to discuss several facets of your company’s financials, including:

How are you managing your receivables?

It’s important for cash planning purposes to know how quickly the majority of your customers make payments on invoices. This often reveals opportunities to get dollars more quickly. Two ways to accomplish this are by offering a discount for quicker payment and offering an online/credit card bill pay option. One of the best way to speed up the collection of receivables is to actively and consistently communicate with your customer when invoices become past due.

How are you managing your payables?

By reviewing vendors’ terms, you may find a disparity between when most vendors require payment and when you’re actually paying. Communication is critical. Ask for more liberal terms and communicate with them if you will not be able to pay on time.

What does your inventory look like?

Check your inventory levels to determine if you have slow-moving inventory that could be discounted for a quick sale, or if you’re purchasing too much raw material for projected sales. Slow-moving inventory and poor purchasing practices will consume lots of cash.

How are you managing your balance sheet – assets and liabilities?

Have you purchased equipment out of cash flow that should have been financed with long-term debt? Purchasing equipment when the checkbook is flush with cash can exacerbate the normal cash flow challenges. Take a look at your debt structure and review it with your banker. Perhaps restructuring your debt with a cash flow friendly SBA or USDA B&I loan would make some sense.

Are you controlling expenses?

If you find yourself in a cash crunch, look at cutting any nonessential expenses. Better yet, regularly review your income statement, line by line, with your banker to identify both short-term and long-term saving opportunities.

Review, adjust and stress regularly

Regularly updating your cash flow projection, as well as stress-testing and making further adjustments, will help you understand where you stand, allowing you to develop a practical strategy for optimizing your cash flow while avoiding surprises for both you and your banker.

For those situations in which available cash can’t cover needed capital investments, like the purchase of equipment, you’ll want to learn more about the business loan application process – and you can, by downloading our Business Loan Application Checklist. Click below to read more.

Business Loan Application Checklist

Topics: Cash Management


Written by Mark Maurer

Mark Maurer, Vice President - Senior Business Banking Officer, leverages 35+ years of experience to provide insightful guidance to businesses of all sizes.


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