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In a Tight Economy, Managing Your Cash Flow is Key


A slowdown in sales. High energy and transportation costs. Economic uncertainty. Before you know it, everyone is paying vendors late. Including your customers.

Understanding and managing cash flow has never been more important. Informal methods that worked when times were good – looking at the checkbook balance, for example, won’t cut it now.

Preparing accurate cash flow projections is vital to remaining solvent and documenting cash needs for your lender. Credit lines can ease shortfalls. The trick is making sure that you can pay them down later, when cash comes in.

Cash flow projections can be prepared on paper or with a spreadsheet program. Some accounting software has a cash flow function, but those can be cumbersome to use.

The standard format is month by month, but if times are tight, some businesses project cash flow by the week. Set up the projection with the level of detail by period and revenue and an expense account that will be meaningful to you. Too much detail can be as useless as too little. A suggested general format follows.

Acme Company Period 1 Period 2
Beginning Cash $10,000 $5,000
Cash In    
Revenue Source 1 $75,000 $70,000
Revenue Source 2 $25,000 $20,000
Total Cash In $100,000 $90,000
Total Cash Available $110,000 $95,000
Cash Out    
Materials $30,000 $30,000
Payroll $30,000 $30,000
Overhead $45,000 $45,000
Total Cash Out $105,000 $105,000
Cash Position $5,000 -$10,000

Many business owners and managers ask, how can I predict the future without a crystal ball? Cash flow forecasting can be more of an art than a science, but any forecast is based on solid numbers – gained from looking at the past.

The first step is to prepare a report that shows actual cash transactions for revenue and expense by your selected time period for the past year. This will reveal patterns of payment by customers to you and you to vendors. Perhaps you have marked seasonal ups and downs. Or you expend a lot of money in materials and payroll with related revenue coming in three to six months later.

Use the historic numbers as your basis for a one-year cash flow looking forward. Using current receivables and payables, adjust the numbers to show what you will receive and what you owe over the next few months.

Next, look at your regular, ongoing costs such as payroll, benefits, insurance, utilities, loans, rent or mortgage, office supplies, etc. Are average monthly costs up or down compared to last year? Make adjustments and project forward for the year for each category. Some bills are paid monthly, and these can be averaged across. Some, like insurance, may be paid at certain intervals. Show those payments in the proper time period.

Project payroll according to pay periods. If you pay weekly on Fridays, say, remember that some months have five Fridays. Even a biweekly payroll will have a couple of months with three pay days instead of two. Since payroll is often a sizable cost and a legally required payment, it is important to accurately forecast cash needs.

The same is true with payroll taxes. It may be tempting to wait to make payroll tax deposits, but the Internal Revenue Service frowns on such actions and will levy substantial penalties and interest.

Often the most difficult task in projecting cash is the revenue piece. Unless you have orders or contracts into the future, you may not have a clear picture of your actual future revenue. This is where business experience, past history and an eye for trends come together.

Where are sales coming from? How are your regular customers performing? Do you have new prospects or lines of business?

Year-to-year comparisons can be helpful. How do this May’s sales compare to last May’s sales? Identifying the reason for any differences is useful, too. A one-time event can skew results.

For example, a major storm shut down transportation for a week so you couldn’t ship or bill. Adjust for anomalies so you can get a true picture of your baseline sales.

Finally, don’t be afraid to prepare more than one scenario: best case, worst case and most likely.

A cash flow projection is a planning tool. It isn’t written in stone and can be changed whenever you get new information. Use it to set goals, manage your operations and test ideas. For help with cash flow forecasting, give our firm a call.