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| Plan
to Avoid Those Nasty Cash Crunches |
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by
Laurie Owen
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While
I can't promise that you'll never run out of cash in
your business, if you plan it right you should never be
surprised if you do.
The key words here? If you plan it right.
Avoiding cash crunch surprises means forecasting your
cash flow ahead of time. But few business owners, even
multi-million dollar operators, do any sort of cash flow
forecasting for their businesses. To me, it's like
driving a large bus down the freeway at high speeds with
a completely covered windshield. It's a thrill I'd
rather not experience as it tends to lead to some fiery
crashes.
I think the lack of cash flow planning among business
owners is due to a number of reasons, which include:
| 1. |
They
don’t know what a cash flow forecast looks
like much less how to create one. |
| 2 |
They
don’t know the value of one. |
| 3. |
Because
forecasting requires making educated guesses,
they’re afraid of being wrong. |
| 4. |
They
are afraid of finding out that they actually
might run out of cash. (I call this the hear no
upcoming evil, see no upcoming evil syndrome.) |
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It's a shame because it's not rocket science (or even
high level finance) and having one can help you sleep so
much better at night.
Let's
take these objections one at a time.
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| #1 |
What
is it and how do you make one? A good cash flow
projection simply shows you what cash you expect
to start with at the beginning of your first
month, what cash you expect to take in from cash
sales and collections, less what cash you spend
on payments to vendors, operations, capital
purchases, and loan principal reductions. The
result is the amount of cash you'll have left
over at the end of each month. Ending cash from
one month then becomes your beginning cash for
the next. Repeat these steps as needed to the
end of your projected time frame. It's like a
checkbook, only it shows your predicted
cash inflows and outflows on a monthly basis.
You can use a simple handwritten worksheet, or
use a spreadsheet to create formulas. |
| #2 |
What's
the value? If you know ahead of time that you
are going to run out of cash, you can create a
plan to prevent the crash. For example, you can
share with your banker how much money you need
in a credit line and how soon you can pay it
back. You can implement management efficiencies
such as moving inventory faster, selling
unproductive assets and cutting costs. Bankers
tend to like this approach much better than
getting a last minute, panicked call to fund the
next day's payroll. |
| #3 |
The
guessing factor. A wise person once said that
the only thing we know when we forecast is that
we're going to be wrong. So for all you
perfectionists out there: get used to it! Use
your prior selling/spending spending patterns as
a starting point and adjust when necessary. |
| #4 |
The
fear factor. If you are concerned enough about
your cash situation that you are afraid to
forecast it, then you probably really
need to start right now. |
Ready
to try? I have several simple (and free)
spreadsheet versions that you can download at
http://www.brs-seattle.com/toolkit.html. |
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Feel
free to forward this newsletter to your colleagues.
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Business Resource Services
Business
Resource Services respects your privacy and does not
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our subscribers' names and/or email addresses.
ISSN 1553-0558
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