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Laurie Owen: Plan to Avoid Those Nasty Cash Crunches

Sleep better at night, knowing you won’t run into cash-flow troubles with some simple predictions and a little bit of forecasting.

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WHILE I CAN’T promise that you’ll never run out of cash in your business, if you plan it right you should never be surprised if you do.

Avoiding cash-crunch surprises means forecasting your cash flow ahead of time. But few jewelers, even multi-million-dollar operators, do any sort of cash-flow forecasting for their businesses. To me, it’s like driving a bus down the freeway at high speeds with a completely covered windshield. It’s a thrill I’d rather not experience, as it tends to lead to some fiery crashes.

I think this lack of cash-flow planning among business owners is due to a number of reasons:

  • They don’t know the value of one.
  • They don’t know what a cash-flow forecast looks like, much less how to create one.
  • They’re afraid of being wrong.
  •  They are scared of finding out that they actually might run out of cash.

It’s a shame because it’s not rocket science (or even high level finance) and having one can help you sleep so much better at night.

Let’s take these objections one at a time.

A wise person once said that the only thing we know when we forecast is that we’re going to be wrong.

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1. What is it and how do you make one? A good cash-flow projection simply shows you what cash you expect to start with at the beginning of your first month, what cash you expect to take in from cash sales and collections, less what cash you spend on payments to vendors, operations, capital purchases, and loan principal reductions. The result is the amount of cash you’ll have left over at the end of each month. Ending cash from one month then becomes your beginning cash for the next. Repeat these steps as needed to the end of your projected timeframe. It’s like a checkbook, only it shows your predicted cash inflows and outflows on a monthly basis. You can use a simple handwritten worksheet, or use Excel to create formulas.

2. What’s the value? If you know ahead of time that you are going to run out of cash, you can create a plan to prevent the crash. For example, you can share with your banker how much money you need in a credit line and how soon you can pay it back. You can implement management efficiencies such as moving inventory faster, selling unproductive assets and cutting costs. Bankers tend to like this approach much better than getting a last-minute, panicked call to fund the next day’s payroll.

3. The guessing factor. A wise person once said that the only thing we know when we forecast is that we’re going to be wrong. So for all you perfectionists out there: get used to it! Use your prior selling/spending spending patterns as a starting point and adjust when necessary.

4. The fear factor. If you are concerned enough about your cash situation that you are afraid to forecast it, then you probably really need to start right now.

Ready to try? I have several simple (and free) spreadsheet versions that you can download at brs-seattle.com/toolkit.html.

This story is from the May 2008 edition of INSTORE.

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Laurie Owen was INSTORE's financial columnist during the first decade of the publication's history.

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