The economic shock of the coronavirus pandemic is starving many businesses of cash. The crisis has radically disrupted the flow of payments that usually lubricates the interconnected world of business. Especially impacted are smaller firms that rely on revenue from a few customers to balance the books at the end of each month.
A surprising number of businesses don’t systematically track their cash flows. As a result, when cash gets tight they don’t have the tools they need to address the problem in a smart way.
You don’t need a full-time staff of accountants to begin getting a grip on cash flow. With just a few simple data points, a business owner can gain the insight required to turn the problem around.
The approach Whittaker & Company recommends to our clients involves a quick weekly review of a few records and compilation of key numbers into a spreadsheet. The goal of our approach is to develop a measuring stick that will indicate whether a company is on the right track with its cash management strategies. Precision is great, but even if the analysis needs to use a few rough estimates to be complete, it will put the business owner in a more informed position.
These are the steps of our approach to simplified cash flow analysis:
Step 1: Gather cash balances.
The first step is to record the company’s cash balance at the start of the week. You’ll want to take this information both from the company’s accounting records and from its bank statements. This way, outstanding checks that aren’t reflected on the bank ledger can be accounted for in the analysis.
Step 2: Quantify deposits and expenses.
Next, compile a record of the prior week’s inflows and outflows. These figures will anchor the analysis. A granular approach, vendor-by-vendor and customer-by-customer, will help with long-term accuracy. Don’t worry if the first few weeks are unusual in some way. Tracking expense spikes or dramatic dips in revenue is an important part of the analysis, and the picture drawn by a consistent, week-to-week analysis needs to include them.
Step 3: Develop projections.
Compile a list of projected inflows and outflows over the next four weeks or longer. In uncertain times, important figures like revenue might require an informed guess. Again, take the time to itemize your projections. Some customers may have a habit of not paying on time, while others are as reliable as clockwork. After going through this exercise for a while, you’ll find that your estimates become more accurate.
Based on these projections and the information you gathered in steps 1 and 2, you can predict where the company’s cash position will be at the end of the week.
Step 4: Evaluate your predictions.
At the end of the week, compare your current cash balance with your predictions at the start of the week. The first few weeks probably will be off the mark, because you’re still learning how to make accurate predictions in step 3. If your projections weren’t on target, use your spreadsheet to study why that happened.
After following this exercise for a while, you’ll begin to make better predictions. You’ll also develop a sense of the specific areas where your business’s cash flows aren’t working as they should. If customers aren’t paying on time, perhaps your collections process needs to be more aggressive. If expenses are too high, are there areas that can be cut back or renegotiated with vendors, landlords, or lenders?
Whittaker & Company has developed a simple spreadsheet for clients to use as they work through this analysis. If you’d like a copy, send us an email.
Were’ here to support you.
How is your business dealing with the current crisis? We’re eager to help our clients and colleagues find strategies for getting through what promises to be a significant recession. If you’re ready to take proactive steps to improve the financial health of your business, get in touch with our team today.
Tax returns, financial statements, IRS communications and similar items are vital to address and process, but they should not be the focal point. Think of these as tasks to get to the real work, which is providing you the information you need and an interchange of ideas to move you forward. The goal is to help you implement your strategies and vision. This is what we do!