Cash is King: Forecasting & Managing Cash Flow | Rea CPA

Cash is King: Forecasting & Managing Cash Flow

If the past several years have taught us anything, it’s to expect the unexpected. Many businesses have seen record years since early 2020, both good and bad depending on their industry. Having a pulse on your cash position can help you navigate the highs and lows that come with running a business. Below are some Key Performance Indicators (KPIs) to monitor along with other considerations to help you manage your business’s most important asset.

Monitor your Days Sales Outstanding (DSO) – This is the average number of days it takes to collect payment. Be proactive in collecting your outstanding Accounts Receivable (A/R). Don’t wait until a customer is 30 or 60 days past due to inquire on payment.

Keep an eye on Days Payable Outstanding (DPO) – This is the average number of days it takes you to pay your bills. Most people like to pay timely, but you can pay too fast sometimes. It’s important to pay within terms whenever possible, but also important to hold onto your cash. 

Maintain quick inventory turns – This is how long it takes to turn over your inventory. Run as lean as you can, with an emphasis on turning your inventory regularly (Inventory turns = Sales). Every dollar of inventory on hand is one less dollar in your bank account

Use credit cards to “float” Accounts Payable (A/P) – Float refers to the time between making a payment and when the funds associated with that payment clear your bank account. Be sure to pay off your card in full each month and take advantage of credit card terms. This often gives you an additional “float” on top of terms already in place with vendors. (i.e. Vendor invoice gives 30 days to pay, you pay on day 30, but have an additional 30 days until payment is due to your credit card provider.) As an added bonus, you can earn cash-back rewards or other perks depending on your credit card. It is not beneficial to use a credit card to supplement cash flow if you are incurring interest.

Establish secondary suppliers – Diversification is key, and that rings true for suppliers as well. Arming yourself with secondary suppliers allows you to be more agile and adept in navigating supply chain constraints and challenges when they arise. By diversifying your portfolio of suppliers, you can position yourself for more favorable outcomes when it comes to negotiations surrounding terms, minimum order quantities (MOQs), and cost per unit.

Communicate regularly with your bank – This establishes mutually beneficial relationships.Take the time to get to know your banker. Don’t just run to them when you need something. Keep them apprised of business happenings and provide them with periodic financial reports. Keeping your bank informed of the current state of business builds a rapport that encourages the bank to be more willing to assist in times of need, whether this be increasing line of credit (LOC) availability, loan deferments, or some other form of relief.  

Utilize a 13-week cash flow forecast – This helps determine when you may run into a cash pinch or be flush with cash. By implementing a cash flow forecast you can more strategically determine whom to pay and when along with identifying non-critical vendors to defer payment to if needed.  Taking a more stringent look at your weekly cash flow can help minimize unplanned or unnecessary spending, as well as identify when you may have to make a draw against your LOC.

Your ending cash balance is your beginning cash balance, plus anticipated cash receipt, minus anticipated cash outlays. When calculating anticipated cash receipts, include collections from A/R (4-week average), along with any other periodic income that is known, such as note receivables, miscellaneous income, etc.

Your anticipated cash outlays should include normal A/P runs (rent, utilities, etc.), credit card payments, payroll, commissions, LOC payments, bank fees, capital expenditures (capex spend), etc.

Complete this calculation weekly and compare last week’s projected ending cash balance vs. the current week’s beginning cash balance to determine the accuracy of the prior week’s forecast.

If used regularly, these tools can provide great clarity in managing your business and can help you avoid unwanted surprises. Successful implementation of some or all these tools will help you to be more intentional with your cash and prime you for continued and future success.  After all, no one plans to fail, so don’t fail to plan.

Contact Rea & Associates’ client advisory services team to speak with one of our professionals today.

by Myles Roush (Wooster office)