Cash Flow Forecasts Create 'Vision'

Once an annual budget is established, there are a number of tools that can be developed and utilized by kitchen and bath dealers to manage operations for the greatest growth and profit.

One such management tool is the Cash Flow Forecast, which has two important applications. The first is for startup or expanding firms to prove they can afford to pay back the interest and principal on a business loan. The second is for use during a business downturn to determine when and how to meet corporate obligations.

The Cash Flow Forecast is also a key document for securing business loans. Fact is, under-capitalization prevents most small businesses from realizing their full income and profit potential. However, proper planning and an effective presentation to lending institutions can overcome this obstacle to financial success. Witness the 12-Month Cash Flow Forecast in Figure 1, developed for a recent startup kitchen and bath operation looking to borrow $125,000. This is a pivotal document banks use in determining whether to make a loan.

What follows are some pointers in creating a Cash Flow Forecast:

  • Project realistic sales order and billed income figures. It's important to be conservative when doing this. If you overstate these numbers, you may be successful in securing a loan, but unsuccessful in your new or expanded operation.
  • Adopt the industry's recommended payment terms of 50-40-10%. Most banks will be impressed that your firm can command these "near cash" terms to generate relatively large monthly total inflows. It's the major reason why a startup business may have a first-year loss but a positive cash flow. The firm cited in Figure 1 projected a $24,000 first year loss (5%) on $480,000 of income (based upon the accrual method of accounting). Yet the forecast shows a positive cash spin-off at the end of the first year (March, 2002 through February, 2003) of $53,594 ($83,929-$30,335).
  • Cash Outflows can be projected accurately from your annual budget. (See the March 2002 issue of Kitchen & Bath Design News, Pages 37-39, to learn the correct steps in establishing a budget and price formula gross profit margin for your operation.) Because the right GPM for the illustrated startup's overhead structure was 36%, 64% of the $40,000 July income became the $25,600 projected cost of goods sold for that month.
  • Interest on your loan should be included in Other Expenses. In the example I've provided, there was income from Cash Discounts and Buying Group Rebates to offset the interest expense.
  • Show the Principal Repayment on a separate line. You want to furnish clear, visible proof to bankers that your business can easily cover the monthly principal repayments.
  • List Assumptions behind the Forecast's projections. Lending officers and underwriters want to understand how you arrived at your figures.

Despite negative monthly net cash flows in seven of the first 13 months of operation, the forecast for the startup firm I've used as an example reveals comfortable cash flow positions at the end of each month. The combination of earmarking $37,500 of the $125,000 loan for fixed overhead expenses and the 50-40-10% payment terms accomplished this important objective. As a result, the Cash Flow Forecast was instrumental in winning bank approval for the $125,000 loan request.

Referring to Figure 2, here are a few observations:

  • Cash Inflows are an outcome of weekly management meetings. Based upon retainers and salesperson reports, the firm's sales manager furnishes a list of job names and sales amounts expected to close each month. The project manager furnishes two lists: one for job starts and one for substantial completions. From these three lists, the business manager can calculate how much is expected in each of the next three months from (a) Deposits, (b) Due-On-Delivery payments, and (c) Substantial Comple-tion payments.
  • Cash Outflows are an outcome of your Annual Budget. The percentages (of Billed Income) for Sales, Administrative, and Other Expenses are a direct result of the budgeting process. Of course, if a known, unbudgeted expense must be made paid during one of these three months, a separate line item must be added to create accurate Cash Outflows.
  • The Forecast signals when cash will be tight. In this Three-Month Cash Flow Forecast, the dealer can start planning for supplemental cash needs 30-45 days in advance of the tight conditions projected for the month of April.
    Once the 12-Month and Three-Month Cash Flow Forecasts are put on Excel Spreadsheets, they're easy to use and update. The information and vision they yield greatly enhances a kitchen/bath dealer's ability to effectively manage his operations.