Creating an accurate cash flow forecast is important whether the economy is good or bad, but it can be an especially tough challenge when your revenue is dropping.
The good news is that when times are tough, companies tend to pay more attention to their cash position, and that is healthy, says Hank Moore, a corporate strategist and author of The Business Tree: Growth Strategies and Tactics for Surviving and Thriving (Career Press).
“Just like there’s a market correction, you may have your own business correction where you make changes that will improve your company,” he says. These changes often start with building a reliable cash budget. Here are five tips on how to create a good cash flow forecast in a bad economy.
1. Get realistic with receivables. If you invoice customers at net 30, but payments arrive closer to net 60, make sure your budget reflects those cash inflows at two months, not one, says Kevin Lombardo, managing principal of General Capital Partners, a turnaround management firm in Denver, Colo.
It’s important to communicate with your customers to pay up, but don’t bet your budget on a quicker timeframe, he says.
“When the economy is slow, too many business leaders think they can turn things around by getting their receivables in faster,” says Lombardo. “But the reality of the current economy is it will probably take longer for the money someone owes you to arrive.”
2. Include everyone in the budget. Many small businesses can have up to ten or 12 people who have authorization to spend money, says Lombardo. “If an employee can write a purchase order, they need the chance to contribute to the cash flow forecast.”
That contribution should be fairly involved. If you’re just trying to consolidate employee spending numbers, you might not have a full understanding of what they’re spending, says Lombardo.
Instead, he suggests taking the time to speak with employees about their needs and their expenses. By doing so, owners can more accurately complete the “outflow” side of the cash forecast, and they can hold employees accountable for the actual results, says Lombardo.
3. Plan for “hidden” expenses. It may be a good idea to cut back on expenses this year, but beware of costs that can creep their way back into your budget and actual cash expenditures.
For example, well-meaning business owners cut back on their travel and entertainment budgets because they’re trying to control costs, says Lombardo. But some of them are often surprised to discover that, in order to drive up sales, they have to invest more on these marketing expenses than they originally thought.
“It’s easy to count payroll and other predictable expenses in the cash flow forecast, but take the time to find and add up the hard ones, such as marketing expenses or warranty costs,” he says.
4. Make cash king. “Tie every activity in the company to cash flow,” says Moore.
This is especially important if you have plans for expansion. “If the numbers in the forecast don’t add up, you may decide that it’s not worth it to try to grow as quickly as you’d originally planned,” he says.
5. Fill gaps fast. If you use a standard 13 week rolling cash flow forecast, you should be able to discover cash shortfalls pretty quickly, says Lombardo. “As soon as things don’t happen the way you project them, whether because receivables don’t come in on time or expenses have gone awry, take action,” he says.
Negotiate with your vendors to stretch payment by a few days, suggests Lombardo. Be willing to make the unpopular decisions, which will hopefully be temporary in nature. Consider halting a new project, or announcing that you’re cutting out overtime unless it’s personally approved by you, says Lombardo.
“Set the tone and push accountability, then make sure people are managing within their expectations,” he says.
