Recently, I was able to travel to France with my wife and one of my daughters. Knowing that we were going to be driving a car for a portion of the trip, I was advised that some type of GPS device would be very helpful. So we bit the bullet and purchased a unit. After we rented the car, we went through the usual series of events with a rental car…find the car, figure out how to start it with a square block-like-key, finally sort out how to turn off the electric parking brake and then remember how to drive using a clutch. One thing that was different was I didn’t have to go back and forth checking my location on a map. The GPS calculated where I was, the best route to reach our destination and make necessary adjustments when I left the planned route. This became critical when we were forced onto side roads when an accident closed the major route we were following. The GPS recognized when we entered side roads and mapped a new, “alternate” route. We could clearly “see” the new path to our destination and the GPS made the necessary adjustments.
For a CFO managing cash, a 13 week cash flow is like a GPS for business. One of the most important tasks I perform is helping owners understand their cash flow needs. Essentially, I create a model that simulates future cash inflows and outflows for a 13 week period. This allows the company to preview cash availability. By looking at a full quarter, the company is able to survey future cash activity and recognize potential shortfalls and that is the beauty of this exercise. When a company is able to see a problem on their cash horizon, this process provides the company with a key intangible—time.
Put yourself in the shoes of the business owner; now you are able to see how much cash the company needs to collect weekly or monthly. It also includes estimated payroll costs, loan payments, insurance bills, utilities, and estimated payments for payrolls. In short, there is an estimate for every cash outflow. To do this well, the company will also need to include an estimate of invoicing and the associated cash receipts from those invoices.
Now take this a step farther. With an estimate for invoicing and the estimate for the associated cash receipts, the company can estimate future AR balances. In addition, for manufacturing companies, with just a little more work, you can estimate inventory balances. For companies that are required to provide data to support a line of credit this becomes even more important. You now have projected data that you can use to forecast the future line of credit as well.
With this data, the company can also forecast the shortfall or availability on the line of credit. Using this tool, the company can see the cash impact of purchasing equipment or financing this purchase. Special cash events like down payments or estimated tax payments can be easily added to the model and these impacts can be viewed. By updating actual activity each week, the model quickly indicates the new forecast and easily displays the new future reality. Just like the GPS, adjustments occur as needed and the new cash forecast becomes available.