Cash Flow Predictions and Shortfalls

In my last column, I wrote about “Cash is King” and shared some of SCORE Mentor, Hal Shelton’s expertise regarding the importance of cash flow management.  The vital issue for CEOs is to be able to deal with cash flow shortfalls and difficulties when they happen and before it is too late.  

Hal tells his clients that it is a mistake to think that events will happen exactly as budgeted a year in advance. In fact, he reminds CEOs that this is not the environment in which small to medium sized businesses operate. There is constant change. Therefore, they need to provide contingencies in their budgeting—assume not all sales will happen, and more expenses will be needed.  

Tasks that businesses can do to manage cash flow to guard against cash flow shortfalls and difficulties before it is too late.

  1. Prepare cash flow predictions to alert you to possible trouble before it occurs
  2. Build up cash reserves during positive cash flow cycles to use during the inevitable downturns
  3. Prepare a budget, generally follow it, but do not be a slave to it. Take advantage of opportunities and pull back when appropriate.
  4. Interface with customers.
    • Send out timely invoices with correct information
    • Make sure customers know when payments are due (saying invoice is due on November 3 is more forceful than saying the invoiced amount is due in 30 days).
    • Monitor your accounts receivables, and call customers if late
    • Do a credit check on customers before selling to them
    • Offer discounts for prompt payment
    • If you have monthly contracts, try for annual; if you have annual contracts, try for 2-3 years. Try to get some payments upfront.
    • Provide several payment options for customers—credit card, Pay Pal, wire transfer or some other form of electronic payment. Payment by check is very slow both for the mail and bank clearing times
  5. Interface with Vendors.
    • Take advantage of all prompt payment discounts
    • Negotiate for expanded credit terms
    • Pay all bills on time                  
  6. Interface with your bank. Get a letter of credit, or if you have one, get a higher limit. The best time to get a LOC is when you do not need it.
  7. Inventory management is important to cash flow.
    • Are you handling inventory in the best way possible?  In today’s competitive marketplace, you can’t afford to lose money anywhere within your business operations. And if you’re one of the 43 percent of small business owners who still count inventory by hand and hand-write or key in data, then those inventory nightmares could become all too real when human error becomes the norm.
    • Spoilage loss: If you handle items with expiration dates, like food or even cosmetics, they can become rotten or unusable if not sold in time. And spoiled products mean your investments go down the drain, along with your potential profits. For example, the U.S. spends more than $218 billion growing, processing, transporting and disposing food that's never eaten.  Researchers estimate there is $1.9 billion of annual business profit potential from the revenue and cost savings of implementing various recycling and food waste prevention strategies.
    • Dead Stock:  An expiration date isn’t the only way your products “go bad.” Dead stock are items that can’t be sold for a number of other reasons: they’ve gone out of style, out of season, or the products become otherwise irrelevant. Often an item is declared “dead” after sitting on a shelf for 12 months. An efficient inventory management system will provide the knowledge you need to order the right amount of these particular items.
    • Storage Costs:  Warehousing expenses fluctuate, based upon how much you store during a given season. When your store has too many products at once or ends up with a product that’s difficult to sell, your storage costs will go up. An inventory management system can help forecast what items sell and what doesn’t, as well as how many sold. This accurate forecasting helps you make more informed purchasing decisions, avoiding high storage costs and saving your business money.  

In summary: As the saying goes, “Cash is King.” If you have it, you can operate and grow your business in an orderly manner and take advantage of previously unforeseen opportunities. If you do not have sufficient cash, it will be a scramble, and you will have to force tradeoffs between making payroll and other priorities.

Put together an ongoing cash flow forecasting process that will alert you when there might be cash flow difficulties or opportunities. Take action now to prevent the negative and position yourself for the opportunities.

About the Author(s)

Dean Swanson

Dean is a Certified SCORE Mentor and former SCORE Chapter Chair, District Director, and Regional Vice President for the North West Region, and has developed and managed many businesses. The Rochester Post Bulletin publishes his weekly article on a topic geared toward the small business community. The articles here are printed in their entirety.

Certified SCORE Mentor for the Southeast Minnesota Chapter

Key Topics

Address Cash Flow Shortfalls Now