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Over my business career I have seen, read and even written many articles regarding understanding and building cash flow modeling. Cash flow is the life blood of any business. Without adequate cash flow employees may not be paid, suppliers may not ship their goods, landlords may threaten to bolt the doors, and taxes may not be paid in a timely manner.  But yet even with these horrifying threats many business owners still have not taken the position of mastering cash flow modeling, let alone understanding cash flow.

During my banker days, I remember many times I heard comments like – “My business is having a great year. Sales are up, and our new location is generating a lot of traffic. My account receivables are up, but we don’t have enough cash to pay all our obligations, and all I need is a short-term loan”. My reply was generally, “That’s wonderful your business is doing so well. How much do you need and when do you think you can pay it back?” Often, I would hear a reply along the lines, “How much can I borrow and I think I can pay it back in a month or two?” How can a banker make a decision to loan money based on that response?

Cash flow is a somewhat easy process to understand. It is basically the cash on hand plus what collections of receivables will be or cash inflows will be from cash sales less what payments need to be made to suppliers and regular recurring expenses like payroll, rent, insurance, utilities loan payments, etc. If the number ends up being negative, then decisions need to be made as to how much more cash sales can be made, which collections can be sped up or who can be paid at a later time. If the number is positive, then you are good to go. There are other factors that can enter into cash flow modeling, like sale of assets, purchasing of services, etc., but I will not go into those here because it may confuse the basic elements.

Often the preparer of a cash flow model will get hung up thinking this needs to be as accurate as possible, and a lot of time is spent trying to zero in on exact numbers. Cash flow modeling is similar to doing financial projections and forecasts in that it will likely never result in exactly what actually happens. What cash flow modeling is all about is providing a tool that will help the business owner make better decisions about cash, and the availability or lack thereof, with some good modeling or forecasting before a crisis situation develops.

If you need help or assistance with cash flow forecasting or modeling in your business, talk to a business advisor who has knowledge and experience in cash flow analysis. We encourage you to visit our Web-site at www.silverfox.org and learn more about the Silver Fox Advisors, and how they can assist you with your business needs, as well as to discover more about our great programs and community outreach endeavors. 

1. Annual Business Plan - Serves as a road map to where the business is going and how it will get there.
2. Annual S.W.O.T. analysis
        Lists of business' strengths so employees can sell from them and the business can capitalize on them.
        Lists the business’ weaknesses so the employees can work to turn them into strengths.
        Lists the business’ opportunities so the employees can capitalize on them.
        Lists the business’ threats so management can manage through them if they occur.
3. Identify the business’ financial goals with details on how to achieve them using measurable processes.
4. Identify the business’ business goals with details on how to achieve them using measurable.
5. Create an annual financial budget on a month-by-month basis and review the actual results vs. the budget monthly and quarterly using over and under measurements, making changes and/or modifications as needed.
6. Create a dashboard of key financial measurements that compares current financial period to budget, same period to same period prior year, and year-to-date to year-to-date prior year.
7. Review the business’ past two to three years actual financial results with the actual financial results of other businesses that operate in the same industry.
8. Review accounts receivable aging schedule monthly looking for large past due of large concentration of client(s).
9. Review accounts payable aging schedule monthly looking for large past due of large concentration of vendors/suppliers.
10. If the business is in the contract-winning business, compare the ratio of contracts won vs. contracts bid on.
11. Review business pipeline report for the current period vs same period month, prior quarter, and prior year.
12. Review outstanding balances, and availability on all lines of credit.
13. Review a rolling thirteen-week cash flow modeling report.
14. Develop a list of KPI’s and measure the actual results monthly vs. established KPI’s.
15. Review compliance with any outstanding loan agreements to prevent default.

List prepared by Horizon Associates, Inc.