Cash Flow: Your Company's Life Blood

By Jim Jacobs

Cash is the lifeblood of most companies and its most important asset. As a partner and consulting CFO, I have the privilege of assisting companies with the financial aspects of their businesses. Cash flow problems seem to be the most significant problem facing these entities, especially with the challenging economy. Even with adequate and timely financial statements, the CEO of a start-up biotech may have a difficult time understanding what their company’s cash position is at any given time.

Financial statements are generally completed within 4 to 7 business days after a month end and are only completed once a month, giving a picture of cash e that is already stale. Making critical decisions about cash is difficult to do with outdated information. This can be avoided by developing a weekly cash flow forecast for the next 10 to15 weeks. This report allows CEOs to determine if and when there will be cash shortages, allowing adequate time to make adjustments to ensure coverage of the company’s financial obligations.

How to develop a cash flow forecast
The cash forecast can be as simple or as detailed as the CEO wants but needs to include the following: 1) beginning cash balances, 2) availability on lines of credit, 3) cash receipts, 4) general accounts payable payments and 5) payments related to payroll, debt service, leases, insurance and distributions which, on average, are larger than general A/P payments, occur regularly and must be paid by a specific date.

The report should start with the total cash balances provided from the most recent bank reports. If multiple accounts are maintained, these accounts can be combined as one total. However, cash maintained in investment accounts or certificates of deposit should be excluded as these amounts are not readily available for operating needs. In addition, any available balance on a line of credit should be included as these amounts are readily available for the operating needs of the company.

When estimating cash receipts, the total should include all incoming cash related to operations of the company and includes all cash, checks, wires and credit card deposits. Additionally, the total should include cash anticipated to be received from maturing investments, certificates of deposits, tax refunds and non-operating income. The benefits of estimating cash receipts and including the amount in the report is that if the cash receipts are not at the estimated levels, the CEO will know immediately and can implement changes to increase cash receipts and collections.

The next section should include estimates of cash outlays for the items listed in #4 and #5 above. The amounts for accounts payable payments can come directly from an accounts payable aging report for the first few weeks, but would need to be estimated for the future weeks. If the company has a policy that a certain dollar amount will be paid toward accounts payable each week, then that would be the estimate. The other items I mentioned are usually paid once or twice per month and the amounts are generally fixed or easy to estimate. They tend to be larger amounts and therefore should be reported separately so the CEO understands the affect these items have on cash flow and should be included in the weeks they are due.

The last item on the report would be the estimated cash amount at the end of each week. This amount would be the result of adding the cash receipts to the beginning cash balance and subtracting the cash outlays for each of the 10-15 weeks. If the cash balance is showing a negative for any future week, the CEO can immediately begin planning to insure enough cash is available to meet the company’s obligations.

Keeping cash flowing is critical to the life of a business, just as blood is vital to the life of a body. The cash flow projection works as a “blood test” to insure the company is healthy and functioning properly. If any poor results are detected, an antidote can be administered proactively to cure the ailments.

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