If you own or operate a small business, knowing how much your assets are worth is essential. In fact, the term “cash position” summarizes something that every entrepreneur should understand. A company’s cash position is calculated by taking current assets on the company’s balance sheet divided by its current liabilities. This gives the business owner a good sense of where the company stands.
After you’ve done that, you’ll never find yourself in a situation where “the business owns you, instead of you owning the business.” Understanding your company’s cash position on a daily, weekly, or monthly basis is an easy thing to do if you create a “13 Week Cash Flow Forecast.”
What is a 13 Week Cash Flow Forecast?
A 13 Week Cash Flow Forecast is a financial spreadsheet used to forecast the future cash flow needs of a company. The analysis helps owners or managers understand and anticipate cash and expense cycles of their business. It is the “big picture,” used to determine working capital needs on a rolling basis.
The analysis helps the business owner or manager get to know and understand their numbers. They begin to understand how one set of numbers impacts another. As such, the manager may find they need to collect cash from account debtors on a more timely basis, find ways to generate profitable sales and make tough decisions in managing expenses to ensure a positive cash position.
Why 13 weeks?
13 weeks gives a full business quarter — a three-month window — for the company to be forward-thinking and proactive to develop and maintain a good cash position. Also, if management sees a growing trend in sales, it gives them enough time to negotiate with lenders for a working capital facility to fund growth until cash is generated from the new sales to support associated expenses.
Also, this helps determine the level of growth the company can efficiently manage before it has to borrow, or buy equipment, hire new employees, or other expenses. Conversely, if management sees a slowing trend, 13 weeks gives them time to plan cost-cutting measures such as reducing inventory and associated carrying cost or sell unused assets to help preserve liquidity.
What are the items to include in the analysis?
The Cash Flow Forecast uses several balances on a rolling basis to help owners manage their business from a financial perspective. Depending on the company and industry, some forecasts may be more detailed than others. Items to include are:
- Beginning Cash Balance
- Estimated Cash Receipts (cash sales for the week)
- Estimated payments from account debtors (credit sales)
- Estimated payroll and associated payroll taxes
- Loan payments
- Rent/lease payments
- General operating expenses
- Vendor payments (accounts payable)
As a business owner, add any other items specific to your business that have a direct effect on cash. A few that come to mind are:
- Add any one-time expense that will impact cash as it rolls forward. In other words, how long will it take to replenish cash or cumulative cash flow respective of the one-time or unexpected expense?
- The sale of assets that are no longer needed. The asset sale may be a one-time event, but how will it affect cash rolling forward. Will the sale help pay-off or reduce debt, or directly add to the cash coffers of the business?
Templates are available online to help you get started. Also, a good CFO, CPA, or controller should be able to create an accurate 13 Week Cash Flow Analysis for your company. The numbers should be updated weekly to show available cash. You’ll notice how changes in one week affect the next week, next month, on so on. Hence, the spreadsheet is a rolling cash tool to help management be proactive in predicting the company’s cash position.
If cash trending gets tight, management may increase borrowing from a line of credit to meet obligations while trying to increase profitable sales to create cash, or management may cut expenses to preserve liquidity.
Considering a 13 Week Cash Flow Forecast is beneficial for companies to help them identify cash fluctuations and accurately predict cash position. Being able to predict cash confidently can help relieve financial stress for the company and its owners.
Not to mention, the company will have a better understanding of its capacity for growth and expansion. The forecast is also a great tool to determine future borrowing needs if any. Business owners will find that bankers and investors will also be impressed as the 13 Week Cash Flow Forecast shows them how serious management is when it comes to their company’s financial success!
Our Cash Flow team provides alternative financing that leverages your inventory and receivables. If you have questions or would like to learn more about our program please complete the form below or call 855-717-6400.