Tip # 7 - Forecast Your Cash Needs


In these volatile times, forecasting your cash needs is a critical survival strategy. Businesses donít run on sales, they run on cash. Without proper cash management, a business will fail. When a business canít pay for goods, services, or pay salaries, vendors quit selling to it and employees will leave.

Many business owners will look at their Income Statements to assure themselves that their business is healthy and making money. The problem is the Income Statement measures the flow of value, not the flow of cash. The flow of value is quite a different measure than the flow of cash. Many companies enter bankruptcy showing profits on their Income Statements. Even if your sales have reached your breakeven number, you may still be in trouble. In order to pay your fixed costs and buy goods, you need cash.

At the beginning of every month, look at the cash in your bank account and then look at every obligation you will have in the next 30 days. Then forecast your sales. What will be your cash needs? What percentage of sales can you collect in advance? What percentage will you have to carry for longer than thirty days? What will be your inventory needs?

Can you increase your cash by reducing inventory or lowering accounts receivable? (If you need a form to help you with cash management, email me at sam@allmanconsulting.com). Recently, one of our consulting clients called and said his supplier had refused to ship to him. He was desperately looking for cash. He had allowed his accounts receivable to edge up, which had taken much of his operating capital. Part of his problem was not having a standardized system to manage his Accounts Receivable. The other, of course, was he was not truly managing his cash at all.

Good cash management can add, in some industries, as much as two percentage points to the bottom line. We recommend that you acquire a line a credit at your bank, so that when you need it, cash will be available to you. The worst time to acquire the line of credit is when you need it; the best is when you donít. Managing cash is one of your most important jobs. Donít let yourself down.

Thanks for reading.

Sam Allman
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