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The 3 B’s Of Cash Flow

Here’s The Buzz On What To Keep In Mind For Your Business’ Quarterly Cash Flow

How is your business’ cash flow? Are you making money? Are you burning through cash?

Do you have any idea what happens with each quarter?

By a quarter I mean 13 weeks, not 25 cents, but if you don’t manage your business tightly over a rolling quarter, you might have just 25 cents left; maybe even less.

There are 3 B’s that result from operating a business:

Building Cash

Burning Cash

Breaking Even.

Businesses and their accounting departments are seldom aware of 13-cash flow models and the value they can bring to forecasting, managing and just getting an overall perspective on how the business is tracking, until it’s often on a slippery slope.

It amazes me that even healthy companies, and their CFO’s and controllers, don’t do this as a matter of practice.

It’s like flying a plane at nighttime with no instruments.

In companies, failure and difficulty is almost always universally behavioral. It can be as much about what wasn’t done as about what was done.

The point of a 13-week cash flow model is to forecast how much money is anticipated to come in each week (inflows), how much is anticipated to go out (outflows) and the net change in cash in a given week, and, then, over the rolling quarter. One of my older friends, a retired successful business owner calls this “how much sticks to your hands.”

Yes, what’s left over.

Sticking to your hands is a concept more elaborately explained in the context of whether the company is accumulating, or depleting, cash. Ostensibly the 13-week report changes every week, so next week, this week drops off and a new week is added on the tail end, so that at a moment in time, the company has the benefit of a rolling quarter to project and forecast what’s likely to happen.

One essential ingredient to this model is the company’s receivables, or “AR” or “A/R” — accounts receivable. The money customers owe the company for the work it’s already done and invoiced. The DSO, or days sales outstanding is a metric to gauge, generally, how long it takes to get paid. On construction projects, government projects, and other issues where payment may be subject to things like disputes, chargebacks, retainage, claims, change orders, credit memos, requests for equitable adjustments, e.g., collections can often pose challenges.

It’s best to plug in the amounts of the payments in columns corresponding to the weeks’ dates in which it is realistically going to come in (by check, wire or EFT/EDI) on lines designated for specific projects or clients, even job numbers. That way, it’s clear that the $15,000 payment from ContractorCo will be arriving X number of weeks from now, but likely on Friday, August 7th because they cut checks on a Thursday and we will likely need to remind them of the need to overnight it. It’s intel like that which can enable us to fall into the trap of hope and thinking we’ve got money coming it which will cover payroll that week.

If it arrives Friday, that’s too late; plan accordingly.

Another crucial element is the company’s payables, or “AP,” or “A/P” or accounts payable. This is the money that your company owes vendors for work, services and materials they have already provided you. Shocker to some business owners and managers, but vendors want to be paid, too. Again, the value of a tight forecast of cash flows enables you to avoid dodging the vendor looking to cover their payroll, by being honest and forthright and saying, “well, Ed, I have a good sized chunk of receivables we’re collecting the week of August 10, 2021and I can clear up your invoices # 10001, 10026 and 10052, totaling $12,502, then.”

True 13-week cash flow models which are honestly and accurately prepared can enable owners and managers to look into the future and clearly assess whether cash is being earned and accumulated or used/consumed.

Properly tracking cash can ensure you don’t get stung.

This reality may very well open the eyes to those receiving this critical report to objectively assess how the company is doing, and adjust overhead and step up sales and collections accordingly. Usually this candor is met with clarity and urgency to begin speaking with customers and vendors and making sure the company is prudent with its resources.

Hiring a management advisory professional can bring objectivity and clear reporting to your business.

You may not like to hear what we have to say, but you need to hear it, it’s the truth, and it enables you to manage your enterprise so that there aren’t any surprises and cash flow shortfalls.