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Building Business Profits: The Roadmap Strategy: Issue 2

Dec 28, 2004

This series is for people running their own business, thinking about going into business or working for someone and wanting to make a valuable contribution to the success of that company.

rking for someone and wanting to make a valuable contribution to the success of that company.


The Near Term Cash Forecast and Financial Flash

The near term cash forecast and financial flash is a foundation schedule that is easy to describe, easy to understand and very difficult to maintain. It is difficult because its simplicity often results in it becoming a lower priority on the weekly agenda of most companies. The only way this schedule and other foundation schedules I will be addressing in future issues becomes part of the business “must do list” is when the owner, President or CFO takes ownership of the information and mandates it will be done.

Why should a business commit to completing the Cash Forecast and Financial Flash each week? The answer is that this one schedule can drive the definitions of the actions that will result in dramatically improved business performance. Let’s examine how that can work.

The schedule I guide clients to adopt forecasts the company’s cash position each week for eight weeks out. Most of the numbers on the financial flash portion of the schedule are a snapshot as of a point in time. Why eight weeks? I have found that most near term issues in the business can be identified and action taken with an eight week forward view. Beyond that there are usually too many estimates and the value of the information beyond that is diminished.

The components of cash flow are revenue and expenses. Revenue results from the sale of sale of services and products. When sales are billed then it is important to forecast cash inflow from the collection of accounts receivable. The primary expenses normally found include: payroll, rent, and other operating expenses. What is key here is scheduling the outflow in the weeks the check will be written.

One can easily vision the result of the exercise is a picture of cash available and whether that cash is growing, stagnant or decreasing. When viewed in connection with the company’s business plan, the cash position serves to validate the achievement of the plan. In those instances where a shortfall of cash is forecasted or the growth rate is less than plan, management must decide what actions to take. Normally, those actions are focused on enhancing revenue and gross margin. In some instances the business may be in trouble and more drastic action is needed to protect the viability of the company.

The near term cash forecast and financial flash is just as important and valuable to an entrepreneur as it is to a mega fortune 500 company. With it’s value proven there are few companies that consistently complete this schedule weekly. Here are examples of surprise issues that can be avoided by developing the information and taking action:

· Sales are growing but margins declining causing a squeeze on cash.
· Accounts receivable collections are not being consistently followed so cash is not collected as plan and write-offs increase.
· Payroll is growing faster than revenue resulting in cash and profit losses.
· Inventory not being sold fast enough with cash being tied up in product as opposed to being liquid.
· Revenue and profits on plan but tax liability not adequately considered in the planning for disbursements. The bills come due and the cash is inadequate.
… and the list goes on.

Several of the above items are addressed on the financial flash section of the schedule. These include: inventory an aging of accounts receivable and an aging of accounts payable. Certain other items can be included depending on the type of business. I often have clients include performance indicators like payroll as a percentage of sales, number of transactions and revenue per transaction and several financial ratios. A new item I am beginning to include is the company’s web site ranking by Google and Alexa.

Remember the near term cash forecast and financial flash is a report card on the company’s liquidity and the trends of that liquidity. Finally if no action is taken to improve the cash position trends, the report becomes meaningless.

Coming Soon

In the next article in this series I will begin to expand on the management system of sales and marketing.

About the Author: Steve Pohlit is the President of Exec Net Consultingand the Chairman of the Diabetes In Control Advisory Board. His career includes, more than 10 years experience as a CFO for companies ranging in size from $40 million to $1.6 billion. Steve has owned and operated a chain of drug stores and has developed a number of Internet based businesses. He is currently writing a manual titled Consulting Secrets Revealed which provides all the details of the processes and procedures he implements with his consulting clients. Steve offers an initial complimentary consultation and is available as professional speaker on Build Cash Profits or Close the Doors.