How To Put An End To Cash Flow Surprises

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Imagine driving down the freeway, a clear view of everything ahead. Watching the flow of traffic you confidently and safely maneuver your vehicle to your destination. Now, imagine trying to make the same drive with a large sheet of canvas covering your windshield. How would you know when to change your speed or direction? The ability to see in front of you is a powerful tool, enabling you to adjust appropriately as challenges arise. Running a business is no different, but too many business owners are driving blindly when it comes to their short-term cash flow.

Many business owners have conditioned themselves to live with this fear of the future, never knowing when they will run into another cash crunch, not aware that they could remove the fear by simply removing the sheet of canvas sheet blocking their view of the road ahead.

But how?

Cash Flow Forecasting

The rationalization that negative cash flow surprises are just part of running a business presumes there isn’t a better, lower-anxiety alternative. But there is, and it has to do with projecting, usually with surprising accuracy, the short-term cash excesses and shortages in their business. The important thing, however, is committing to developing and maintaining your forecast.

Whenever I mention forecast or projection with a group of business owners, at least one-third of them become visibly skeptical. The more vocal will tell me, “There’s no way you can predict the future,” and “I never know when my customers are going to pay, so how could I ever predict cash flow.”

My response to their skepticism is always the same.

“Before you say it’s not possible,” I suggest, “tell me how much less anxiety and fear you would experience if I could promise you that you will have no cash flow surprises in the next 90 days? That’s right, you’ll know well in advance of any inabilities to make payroll, loan payments, and keep your vendors, suppliers, and the IRS current.”

No matter how skeptical a business owner may be about the accuracy of forecasts, they cannot deny one thing – business owners and entrepreneurs are problem-solvers, and their efficacy in this capacity is increased the sooner they know the problem exists and the more time they have to solve the it. Some of the following questions help them begin to realize there are likely some patterns and information that can bring order and organization to what has felt a bit chaotic and out of control:

• Do a majority of your customers generally follow a pattern when paying you?
• Do you have fixed costs, like rent and administrative payroll, which you can accurately forecast for the next three months?
• Do you have internal guidelines or procedures that determine when you pay your vendors and suppliers?
• Do you have a pretty good idea of what your sales volume will be during the next quarter?

Within these questions and more we can find a base of validated, time-tested assumptions we can use to accurately project the next 90 days of cash flow into your business. This information is usually organized on a week-by-week basis and accounts for all of the cash inflows and outflows of your business, along with your cash and line of credit balances.

The Take-Away

You should never take a reactive position on the cash flow of your company. Don’t fall victim to the common belief that you have to drive your business blindly. Use short-term cash flow forecasting best practices to see clearly, and you’ll be on the road to understanding — and ultimately improving — the short-term cash flow, or working capital cycle, of your business. Perhaps the best result of all of this is that the only surprises you get will be the ones you enjoy, like tax refunds and early payments from customers.