The Value in Knowing Your Business’s Cash Needs

Although it appears that the worst of COVID-19’s impact on our healthcare system is behind us, we are not out of the woods just yet, and it is more important than ever to monitor your business’s cash flows. Many businesses have been able to get by with funds received through the Paycheck Protection Program (PPP), but those loans were intended as a short-term fix. For many PPP recipients, there may not be any more relief programs to rely on, and they’re facing the reality of having to repay the loans.

13-Week Cash Flow
Because companies are facing more uncertainty and volatility than ever before, it is imperative to have a firm understanding of the changed economic outlook and cash needs for your business. Knowing how much cash your business generates, from what sources, and specifically when it is generated is important. Knowing how much cash your business will need and when it will need it is equally important. A great tool to assist in this endeavor is a 13-week cash flow projection. 

13-week models are common because they cover a full quarter of a business year. In addition, since they cover a shorter range, they allow for more accuracy than an annual cash flow. Preparing a 13-week cash flow will force you to look at your business inflows and outflows and make decisions about items such as capital expenditures; whether or not and when you need to access your credit facilities; where to reduce expenses; and ensuring receivables are being collected as quickly as they were pre-pandemic.

This cash flow forecast will allow you to prepare for any upcoming liquidity issues and quickly pivot where needed. Since your budget and cash flow model will have common components, keep in mind that the 13-week cash flow should complement the budget, not take the place of it.

Projection Template
For this projection to work, you will need to create a template. In the template you will enter an opening cash balance and then make assumptions on weekly cash inflows and cash outflows. No one is clairvoyant enough to nail these assumptions for the next three months of business, but this exercise will force you to view things at a more granular level and do a deep dive into your business.

For the inflows, you want to account for cash you believe will be collected (not earned) on a weekly basis and the expenses paid (not incurred) on a weekly basis. Doing this will give you an estimated cash balance at the end of each week. Delineating the different vendors and expenditures down the left hand side of the template allows you to modify the payments and compare different scenarios; this is especially meaningful when you see liquidity get tight during a certain week or weeks. Once a week, place the actual results in the template and extract the estimates for that week - this will automatically update the cash balance. As each week falls off, add another week and you have a rolling 13-week cash flow projection.

Make sure you are monitoring the results and taking time to review the dates. While you are refining your process, you may find that it makes sense to add or delete categories based upon your analysis, or you may want to broaden or narrow your inflow and outflow categories in order to track the data that you determine to be most valuable.

As a business owner, it is essential to have a plan in place to have the right amount of cash at the right time to handle your cash needs. The best way to have peace of mind is to develop and maintain an effective rolling 13-week cash flow forecast and to take action based on the results to manage and control your company’s cash flow.