a Cash Flow Forecast Can Help You Manage Your Business During Times of Crisis and Uncertainty

There are times when all businesses go through a financial crisis — a properly executed cash flow forecast can help you weather the storm. 

What is a Cash Flow Forecast?

The creation of this forecast can be time-consuming to set up because you and your team need to make assumptions about customer payments, payroll, and other expenses.

A crucial component of business planning, The forecast contains these elements:

• Opening Cash Balance - what you have on hand
• Receipts – this is an estimate of date to be received by customer/item
• Opening Balance + Receipts = your Total Cash In
• Payments are broken down by item
• Receipts - Payments = your Net
• Closing Balance is the difference

This is best practice is the completion/update of a cash flow forecast every week during tight times.

The greatest challenge is the estimate when of customer receipts. This is a fluid process, not a perfect process, but a necessary means to give you a picture of your business’ most valuable asset – cash.

As cash tightens and the time comes for serious negotiations with your customers, vendors and bankers, stating your cash position makes your position more understandable and gives you an edge in negotiations. 

Mistakes to Avoid When Using a Cash Flow Forecast

As this is updated weekly, your prediction abilities will improve as your understanding of the company’s historic cash flow data is studied.

But, as a business consultant who has worked with owners and CEOs for decades, the biggest word of caution I can give is this — do not pretend it gets better quickly.

Unfortunately, there are several areas where your assumptions in the cash flow forecast can lead you in the wrong direction:

Optimistic Sales Receipts

If the entire economy is turning down, be sure that you don’t convince yourself that a downturn won’t impact you or your customers as much.  It will happen somewhere in the supply chain in your industry, and the cascade is real – that is how economies fall quickly into a recession.  If you are hurting, your customers are hurting.

Underestimating Pressure to Pay Suppliers

This is a balancing act – keeping in good terms with suppliers is essential so that your raw material supply isn’t disrupted.  No matter how long the relationship, be careful about assuming that a supplier will not cut off your access.  Just like your customers, your suppliers are hurting as well and will take steps to protect themselves.

Not Reducing Payroll Quickly

There is nothing good about letting people go due to an economic squeeze.  Based on your cash flow forecast, you will know when this day is coming.  Remember that the estimate is not exact, and with a rapidly contracting economy, the cash deficiency will hit faster.  Take immediate steps to reduce payroll costs.  You may lose some quality talent, but your understanding of future cash flow will also let you know when they can be re-hired.

Some companies try across the board pay cuts; other companies will cut people.  For the most part, reducing headcount offers more significant savings, though more heartbreak, than across the board pay cuts.

The Bank Understands Your Problem

The bank is not the enemy; it is a business just like yours.

The bank is in the business of lending and getting repaid. If the bank is worried about repayment, it will take steps to protect itself, just like your other suppliers.

In this period of uncertainty, a rolling cash forecast that is updated weekly is a critical tool for you. This forecast gives you data to make better decisions with a little less emotion. Try to focus on a 60-90 day window of pain and base your decisions on that window and the available cash.

As cash tightens and the time comes for serious negotiations with your customers, vendors and bankers, stating your cash position makes your position more understandable and gives you an edge in negotiations. 

The cash flow forecast will become your negotiation tool — knowing how much and where you can make deals.