The Value of Accurately Projecting Cash Flow

The nature of the kitchen and bath design and remodeling industry is that most of us are dealing with a few large projects that can have fairly erratic cash flow related to them. If you’re dealing with one or two projects at a time, you may be able to visualize the revenue and expenses from these in your head and do your projecting mentally. Even then, it’s easy to forget, or even deny, that some cash requirements are coming your way.

Too many businesses find themselves in a cash flow crisis because no one took the time to sit down and accurately forecast whether there will be enough cash to pay the bills a few weeks from now. If you make this process a regular part of your accounting reporting, you won’t be surprised by unexpected cash crunches.

This month we’ll look at an approach to projecting cash flow. We will break the process down into three areas: requirements for cash, sources of cash and the surplus or shortage of cash on hand. We’ll use the spreadsheet at right to project our cash flow over the coming weeks.

Requirements

The items to include are obvious, such as phone bills, utilities, rent and loan payments. Your accounts payable will include billings from vendors and sub-contractors. The vendor payables will have varying terms, and due dates will depend on when material is picked up.

You will have to analyze the payables to determine when payments will be made. Depending on how your business’ contract with clients is structured, the revenue from projects may not match well with payments required for vendors.

Several of the different cash requirement items – such as sales tax, commissions, etc. – can be estimated rather closely since they are based on sales. Many other items are contractual payments, such as loan payments, rent, insurance, etc.

Sources

Normally a business will have two sources of cash: sales of projects, which can be broken down into new sales and progress payments for work completed; and a bank line of credit.

We’ve discussed the importance of how the payment schedule should be structured in your contract. For the client, payments should track the progress of their project. For the business, the payments should occur often enough and in amounts so that the work does not get too far ahead of client payments.

The SpreadSheet

The sections for requirements and sources on the spread sheet above are pretty straightforward: Simply drop the amount for each item into the week when you expect it to occur and then the subtotals for requirements and sources can be programmed to total automatically. The last section of the spreadsheet is where it gets a little trickier.

The net cash flow for the week is calculated by subtracting the total requirements from the sources for each week, and that produces the amount shown on that line. The next line is used to roll the analysis forward from week to week by bringing up the net cash position from the previous week. This can be programmed so that the amount automatically transfers.

The next line is your beginning bank balance, which only goes into the first column to input your cash position at the time you start the projection. The next line is used to calculate the amount you will need to increase or decrease your line of credit to maintain the desired bank balance. The ending bank balance is a total of the four lines above it. Finally, the bank line of credit line is programmed to calculate the balance on the line of credit after you have filled in the increase (decrease) in the line marked credit line.

This tool can be modified to project on a monthly basis, if that is more meaningful for your business, and extended for indefinite periods of time. Simply submitting yourself to the discipline of putting your cash flow forecast onto a computer spreadsheet will cause you to pay more attention. It will also provide you with guidance when you are considering significant purchases or commitments.

Running out of cash is no fun, so consider a formal projection procedure, such as that outlined above, as one of the most important tools your kitchen and bath firm has.

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