Cash is the lifeblood of any business. But can you imagine if we had to consciously manage our blood? What a nightmare: monitoring red blood cell counts to ensure oxygen is carried in and carbon dioxide out. Producing plasma to transport nutrients. Sending in the white blood cell troops for emergencies. Compared to that, managing cash flow is a breeze. Well, that might be going too far – but it is manageable. A 13-week cash flow plan can help CEOs and owners stay on top of their cash. So, how do you stay on top of the plan and bookkeeping services?
The 13-Week Cash Flow Plan
According to a US Bank study, poor cash management causes 82 percent of business failures. Now, the reasons why these failed businesses had cash problems in the first place vary; the consistent theme, though, is that they weren’t able to manage their cash efficiently or effectively. A 13-week cash flow plan is by no means a panacea, but it is a tool with which you can keep an eye on current working capital and forecast the future cash flow needs of your company.
Your plan should be updated on a weekly basis, and it should go out 13 weeks. Thirteen is not a magic or lucky number, or at least that’s not why you should extend your plan for 13 weeks. This time period gets you a bit past the quarter in case there is a big quarterly payment looming. That way, you can see it more clearly on the horizon and plan for it.
Be diligent, update and manage your plan every week, and keep rolling it forward. The big question is what should be included in your cash flow plan? What exactly should you be keeping on top of?
Accounts Receivable. Unless you have some sort of metric in place, you cannot tell if the accounts receivables are growing because sales are growing or because they’re getting older. To determine this, we look at days in accounts receivable, a terrific metric. In other words, how long does it take to collect payment? Is it 20 days? 30? 45? Look at this month-over-month so you can spot potential trouble spots.
Sometimes, your bookkeeper won’t be entirely forthcoming if he or she is behind in sending out invoices! But if you keep on top of your days in accounts receivable, you’ll be able to spot trends. “Oh, this account was at 25 days? Then 30? Now 45? Something’s going on!” The exact “what” requires some digging, but having this metric in place as part of your overall cash flow plan means you can go back and find out much more easily – and quickly.
In your plan, work in when you expect receivables to come in over the 13 week period. This will help you manage cash on a micro level. On a macro level, knowing your days in accounts receivable will show you month-over-month if trends are forming.
Accounts Payable. What comes in must go out. In a cash flow projection, you want to look at when you pay your bills. Obviously you don’t have a lot of choice – you have to pay your employees! You need to keep your people happy. It makes life easier if you keep your vendors happy, too, so they continue to provide vital products or services. Payment for the latter, though, may be a bit more flexible.
If you do run into a cash flow issue, it is vital to communicate with your vendors and keep them apprised of the situation. This is especially true for your strategic vendors because, depending on the circumstances, they may be able to offer you better terms. They probably value your business and need you as much as you need them. Now, if you’re asking for 60 or 90 days, that’s going to make them nervous, no matter how much they value you. But if it’s a temporary situation, they may be amenable to a deal.
Maintaining your 13 week cash flow plan, though, can help you spot potential shortfalls earlier so you can take steps to ensure you make payment on time. Renegotiating vendor deals or asking for better terms is not an option you want to exercise if you can possibly avoid it.
The 13 week plan helps you manage both accounts receivable and accounts payable to get an accurate picture of your company’s cash situation: to monitor how cash is carried in and how it’s carried out, to produce enough cash to provide every cell of your business with necessary resources, and to send in enough working capital for emergencies. A skilled financial advisor or part-time CFO can help you develop your plan and manage the lifeblood of your business.