In this series, we have so far introduced the cash flow cycle, some key working capital and cash flow management terms, as well as the importance of prudent cash flow management. We will complete cash flow projection today and present some principles and practices of wise cash flow management.
Cash flow projection ‘template’: A simple cash flow projection table for a small business will comprise essentially of several rows and columns of cash receipts and cash payments. At the top are cash receipts that add up to the total cash inflow for a period say, a month or a year. The individual inflows might include cash sales receipts, collection of receivables, loan proceeds, etc. These are added up to give you the total cash inflows for the period. Below the rows and columns of cash inflows, you will have another set of rows and columns for cash outflows. Individual cash outflows might include purchases of materials and supplies, payment of salaries and wages, interest payments, principal loan repayments, etc. These are also added up to make the total outflow for the period. The total outflows (‘B’, in the table below) are deducted from the total inflows (‘A’, in the table below) to get the net cash position at the end of a period. The net cash position at the end of one period is carried forward to the beginning of the subsequent period as its opening cash position.
It should be noted that the specific composition of cash inflow sources and cash outflows may be peculiar to individual businesses. Consequently, you are to draw up your own cash projection table to meet your own plans, requirements, and realities. The table below is a sample of how a simple cash flow projection table might look like.
There are several simple and free cash flow projection templates that are available on the internet, and which can be adapted to meet your requirements. However, if you are just learning to develop a cash flow projection or are not yet proficient, I strongly suggest that you first learn to build it manually and then ‘graduate’ to the use of Excel before you begin to use the adaptable templates on the internet. Equally importantly, you can engage an accountant or a business consultant to help you through the exercises until you fully understand what might go into cash projection table, how, when and which ones will not. This is very important so that you become very clear of what it takes to make the projections in varied situations. Once you get very comfortable, you can begin to use the templates.
Principles and practices of wise cash flow management: I find three variables particularly important in running most businesses. These are profitability, cash flow and growth. In its simplest, profitability is about your sales revenues being greater than all attributable costs of delivering your products or projects to your customers over a period. In the short run, a business may survive and even grow with little or no profitability as investors and creditors continue to provide required cash. But this is usually not sustainable in the long run. The immediate and long run survival and growth of a business can only be sustained by being profitable and with positive cash flows. As it is often said, cash is truly the lifeblood of a business. Some of the principles and practices of wise cash management include:
• You must be able to make intelligent and realistic projections about the economy, your industry, business, and the market.
• You must keep complete and accurate financial records. Specifically, you have to generate cash flow projections based on your plans, operational and market realities.
• You should remain alert to the objective of maintaining positive cash flow even as you strive to maximise the profitability of your investments and operations.
• Be alert and ready for negative cash flow periods based on your projections. In such situations, you must either plan to cover up the gap in advance or cut out on certain outflows.
• Minimise credit sales and the risks associated with that. Where you must make sales on credit, you should have a clear and firm credit control and debt collection policies and actions.
• Assess your customers and limit trade credits to only those deserving. Even as you do that, you should also ensure that you have contractual documents to protect your interests.
• Always speed up the collection of your receivables and be friends with payment officials of your customers’.
• Don’t wait until due dates before you follow up with your customers on payments. Rather, begin to formally remind them of upcoming payments days and weeks in advance!
• Negotiate to enjoy trade credits from your suppliers and delay payments within the period you have, but certainly without defaulting.
• Your operations and the technology you deploy should help you facilitate receipt of payments.
• Build a good relationship with your bank and ensure that you get a standby line of credit.
• Watch out for and reduce the tendency to tie down cash in inventory and even fixed assets.
• Think through and assess each investment and payment you will be making. Negotiate and get favourable payment and repayment terms that give you generous breathing space.
• Hold on to your cash fastidiously through each payment you will be making and eliminate all wastes.
• Where appropriate, consider leasing rather than outright purchase of assets.
• Review your financial and cash position regularly.
With these, we conclude on this series and next week, we will take up Providing Leadership.