cash flow

13 Week Cash Flow Statement

by tomgray | on Jan 01, 2012 | 2 Comments

“Cash is King” in a small business.  A cash shortage is one of the hallmarks of a business slipping into trouble – a distressed business. The owner’s first priority is to pay the vendors whose services keep cash coming in. Bank loans don’t do this, so the owner asks the bank to wait for its payments. In response, the bank wants to know the company’s prospects for paying in the future. It asks the owner to forecast revenue and costs, and predict cash flow using a 13 Week Cash Flow Statement. See 13-Week Cash Flow Model Creates Clear Communication Channels.

This is a spreadsheet starting with cash-on-hand. It then adds cash expected to be received from outstanding invoices, from work in progress, and from new business in the next 13 weeks, i.e. the next quarter of the year. It subtracts the cash used to pay for the variable costs for completing such work, and the expected overhead or fixed expenses to be paid during this period. The net is called “cash flow.”

The spreadsheet columns are the 13 weeks, and the cash flow at the bottom of each week becomes the cash on hand at the start of the next week. Thus the net at the bottom of each week is cumulative, showing all the expected cash-on-hand at the end of that week.

Each week’s column is like the page in a checkbook register, with cash at the top, money coming in, money going out, and the cash on hand at the end of the week.

Small business owners usually understand their expenses very well, and they know what is owed them from completed work and work in progress.

Their problem is forecasting new work and new revenue. Their bookkeeper is not a forecaster, and their accountant looks backward, not forward, so the cash forecast becomes the owner’s task. Unfortunately, the owner of a small business spends most of his or her time working in the business, not on the business. They normally rely on others to track the numbers.

When the owner has to do the forecast, they feel overwhelmed by the variety of possible work that might come in, and the uncertainty of what kind of work will come in during any given week. They know the bank is being reasonable to ask about their prospects, but feel frustration and resentment when asked to predict the unknown!

How does a small business owner predict revenue, costs, and cash flow on a weekly basis? Is there a secret formula? Probably not, but there are some techniques that can help you make a reasonable forecast for the coming weeks, whether or not your business is distressed and facing a cash shortage. We’ll describe them in future posts.

Tom Gray is a management consultant focused on small business, a Certified Turnaround Professional (CTP), and a SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.

13 Week Cash Flow, Part 2 – Forecasting the Knowns

by tomgray | on Jan 01, 2011 | 2 Comments

Forecasting sales, revenue, and cash for the next 13 weeks is the most difficult part of the 13 Week Cash Flow Statement for a small business because it is the least certain. See 13 Week Cash Flow Statement. But this task has some easy parts too. The first step is to forecast known revenue and costs – those for outstanding invoices, work in progress, and new work from proposals already submitted.

First, identify the invoiced amounts you have not received yet. Note how much you expect to receive in each week.

Second, consider your work in progress. How much will you invoice for this work? When will you send the invoice, and how much later will the cash payment be received? Your revenue is booked when the invoice is sent, and this shows up on the “income statement” or “P&L Report”. But for a cash flow statement, the important date (or week) is when the cash comes in. You cannot pay a vendor with booked revenue! You need cash.

This timing difference between invoice and receipt of cash is the most important difference between the income statement and the cash flow statement.

If you expect to pay out additional cash to complete this work in progress, be sure to add that additional expense to your predicted cash outflow for the coming weeks. It is good idea to use separate lines (rows) in your spreadsheet to show the costs for work in progress separate from the costs of new work you have not started yet. In each case, the typical rows would be materials, labor, and subcontractor expenses, any unusual shipping or packaging expenses, and any sales commissions. These are called “variable costs” or “costs of goods sold (COGS).”

Third, consider the future work you know about. You may have already made a bid or proposal, or you intend to. This should be a third set of rows in your spreadsheet. It’s a good idea to use a separate sheet to estimate the revenue, costs, timing, and percent likelihood for each of these jobs; then you can use a summary on your master spreadsheet.

For this future work, you will need to make some realistic estimates. When will the customer decide? Should you assume he will take the price you bid, or will you need to come down a bit? When will you order supplies and when will you have to pay cash for them? When will you complete the job and invoice it, and when will you receive cash from the customer. If there are “progress payments” along the way, how much and when?

The last question may be the hardest: what are your chances for getting each of these jobs? You will multiply each of the revenue and cost figures by this “probability percentage” estimate, making your forecast a more realistic view of the prospects for the business.

The final step is to estimate business as yet unknown. We’ll cover that in the next post. At this point you know the format of the 13 week cash flow statement, you forecasted the revenue and costs for outstanding invoices, work in progress, and likely new work from bids already submitted.

Tom Gray is a management consultant focused on small business, a Certified Turnaround Professional (CTP), and a SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.

13 Week Cash Flow Part 4 – Forecast Complexity & Conclusions

by tomgray | on Jan 01, 2011 | 1 Comments

When developing a 13 Week Cash Flow Statement in a job shop, forecasting future business seems especially difficult due to the variety of jobs that might be won in future weeks. The solution is to select a few typical product or job types from experience, and forecast those as representative of the type of work that might come in. Choose job types significantly different from each other.

For example, 60% of the work might be small parts you have built before, 30% might be new jobs with simple designs, and 10% might be new complex designs. Probably the more complex jobs will have longer durations, so that you incur cash costs but do not receive cash payments during the 13 week period. You might use different percentages if you choose to do best case and worst case scenarios too.

Once you have a forecast, check it to see if it is reasonable. How does it compare to your cash flow from prior weeks? It should not be radically different. See 13 Week Cash Flow Statement, 13 Week Cash Flow, Part 2 – Forecasting the Knowns, and 13 Week Cash Flow, Part 3 – Forecasting Unknowns.

Do you have enough labor to do the work you forecasted? Do you have enough space and machine time? Does the forecast imply more time spent on quotes and selling than you yourself have available, given the time you will be spending on production and perhaps bank negotiations?

A common error is double-counting labor. Many company bookkeepers show all payroll as a “fixed” cost because that is the easiest way for them to calculate payroll taxes. But that means you cannot know the margin per product, because you don’t assign the labor costs to the product.

In the method described in these posts, we calculate labor requirements as a variable cost, that is, per job. Since people always have some paid time not assigned to particular jobs, a reasonable forecast will need to show non-productive labor time and cost as an overhead or fixed cost, and labor assigned to jobs as variable cost or COGS. Payroll taxes should be split the same way. Non-productive labor time can be as much as 45%, so this is important! Your accounting software (e.g. Quickbooks) entries showing payroll as a fixed cost are only a starting point.  You will have to split payroll into productive and non-productive components to forecast cash flow by product type.

The business owner should draw two types of conclusions from the Cash Flow forecast: product profitability and business viability.

Analyzing the cash flow by product or job type as described in Post 3 shows you the margin per product before overhead. If overhead is 30% of total company revenue, and your product generates a 30% margin (revenue less variable cost / revenue), then you break even and have no profit. In this example, if you want a 15% profit before tax, your products must generate a 45% margin on average. If they don’t, you must reconsider your price, perhaps raising your “shop rate”, or discontinue products that fall short of the target profit.

Business profitability depends on product profitability, as above. The bank asks for a 13 week view because it knows that a near term forecast is more reliable than long term. But the business owner who has long duration jobs often decides to forecast cash flow for six months (26 weeks) to be able to see the cash payments for long duration jobs, rather than just the costs. In this case, a longer view is needed to get the most realistic picture of business viability.

Forecasting cash flow from unknown future work in a job shop can be done by choosing representative product or job types. Key issues include double-counting labor, nonproductive labor time, shop rate, and margin per product or job type.

Tom Gray is a management consultant focused on small business, a Certified Turnaround Professional (CTP), and a SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.