August 25

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7 Step Cash Flow Forecasting Action Plan

By Patrick Millerd

August 25, 2020

cash flow, cash flow analysis, cash flow forecast, cash flow how to calculate, cash flow in a business, cash flow management

Covid-19 bred a devastating cash flow forecasting crisis in small and medium sized businesses. Making many business owners painfully aware of their business vulnerability and the importance of cash flow manaement.

“Two out of five small businesses expect to run out of cash within six weeks, according to a survey. And one in five small businesses say they will run out of cash within three weeks.” writes Timothy Adler

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Every SMB faces a cash flow crisis at some time. 

While many of these crises are of their own making there are also rare occasions when businesses have to face a “black swan” event. A unexpected crushing punch that stresses any size business. 

At these times, small business owners face a financial black hole. And confronting this crisis is both scary and urgent. 

Here is the solution to follow at any time the business faces a cash crunch..

Cash Flow Forecasting Action Steps

When setting out it may feel like attempting to climb Mt Everest with no training or equipment. 

Whatever the circumstances!

Do it

Step 1: Prepare a Simple Cash Flow Forecast

This exercise is not about bookkeeping or accounting it is simply about the cash!

It should not be delegated to the accountant ... it is the responsibility of the business owner!

Start with an understanding of the big picture by asking and answering questions like:

  • What cash does the business need? 
  • How much cash do I need personally? 
  • What cash resources are available in the company? 
  • How much cash could I raise?
  • What resources are available from government and bank schemes? 
  • Are there any expenses can be deferred? And for how long? 
  • What expenses can be cut immediately?
  • What are other options? 

Resource: A trusted advisor or friend - when making tough and painful decisions it’s easier to have someone else to bounce ideas off.

Action: On a spreadsheet ( Get your Google Docs example here) detail the weekly unavoidable expenses for the business for the next 4 to 5 weeks. If necessary also do a personal cash flow analysis.

Then include the income. These are any definite amounts that will be collected (no guesses or wishes!).

Finally prepare yourself for painful decisions and conversations. These are going to be tough and stressful so be ready.

Step 2: Cutting Overhead Costs

Focusing on the expenditure side review an up to date income and expenditure account. 

Review last month's bank statements - business, personal, and credit cards. Make sure no expenses are overlooked. Check back over the previous two to three months to see if anything was missed.

Then to the action.

Over time every business accumulates fat. This is the time to brutally trim it.

Eliminate expenses like:

  • Subscriptions you don't need.
  • Monthly services that are not used.
  • Premium subscriptions or services which have cheaper options.
  • Change service provider retainers to service or project-based fees.
  • Bring external services like bookkeeping and payroll in-house. 

Then look for any expenses that can be renegotiated? 

With this exercise creatively look for every cost saving option

Resource: For a few good tips on effective negotiation I recommend reading Chris Voss’s book  “Never Split the Difference”  

Action: Make phone calls to negotiate potential savings, renegotiate existing agreements, ask questions and be persistent! 

After completing this step update the Step 1 Cash Flow Summary with the savings.

Step 3: Cutting Staff Costs

Staff costs are the major expense in many SMB’s and often have the biggest savings potential. Unfortunately, they are also the most difficult to confront. 

One option is to do this exercise without considering the actual incumbents. Approach it as an exercise of rethinking the business structure. Draw up a new organisation chart. Analyse every role and define the deliverables or accountability for each position. 

Do some quick research on the market pay rates for people in these positions (taking into consideration factors like the location, the size of the business, unemployment in the area and the required deliverables).

With the structure defined, map the existing staff on to the chart. 

At the same time asking questions like: 

  • Is the position really needed? 
  • Are there options to automate?
  • What are the alternatives to getting the same deliverables? 
  • Is the function executed in the most optimum way?
  • Can positions be combined?
  • Does it need someone full-time or part-time? 
  • Is it necessary to be on site or could it be remote? 

After completing this exercise the next thing to do is to review each person’s performance against the revised structure and the requirements of the role. Then to compare the salaries for the role with the market levels. 

Being as dispassionate as possible ask the following questions:

  • Is there an excess headcount?
  • Are people paid in excess of market rates?
  • Are there under-utilised people?
  • Who are the under-performers?

A number of business owners I have spoken to recognised during lockdowns that their businesses had excess staff. This became obvious as working with a skeleton staff the business worked as well as it did before ...  with significantly fewer people!

Taking the Hard Actions with Staff

Focus on What's the best decision for the business?

The difficulty with dealing with staff is that over the years, relationships have been built with them – many are loyal and hard working. As a result there will be waves of emotion when dealing with certain people ... but this is the time to make the hard decisions. 

What are the immediate options to reduce staff costs?

  • A blanket reduction in numbers either permanently or for a limited period. 
  • Reducing pay across the board or for specific functions.
  • Deferring or not paying any bonuses until the business can afford them.
  • Introducing short time – reducing the working week with a reduction in pay or using accumulated leave.

Resource: This is another step where you will probably need support from a trusted advisor. They are not emotionally invested and will give you a more rational perspective.

Action: Based on these saving decisions adjust the Step 1 Cash Flow Summary.

Step 4: Suppliers of Goods and Services

Speak to suppliers about deferring or splitting payments or settling accounts with discounts and come to new agreements. 

Negotiate extended terms. Commit to continue supporting suppliers who will assist (this is not a threat but a commitment!). 

Investigate the possibility of holding consignment stocks and only paying for these items when they are sold.

Get quotes on any significant cot items and either switch suppliers or use the lower price as leverage with existing suppliers.

Consider options like those in Step 2 and ask suppliers what they can offer. 

Resource: In “Never Split the Difference” Chris Voss covers a number of effective negotiation tactics. Another useful resource is Ramit Sethi's "I Will Teach You to be Rich". 

Action: After completing this process make any payment adjustments to the Step 1 Cash Flow Summary.

Do NOT just let the situation drift without being proactive and having the one-to-one conversations. Note that this is not an email or WhatsApp communication but ideally owner-to-owner.

Step 5: The Cash Flow Crisis Decision

After making all the changes analyse the Cash Flow Summary and decide whether it’s doable. 

If yes, go ahead and make it happen. 

If no, go through the exercise again and see if there is anything else that can be done to either reduce or defer payments or get in more cash.

This is the time to decide whether the mountain is too high and whether you have both the resources and drive to make the plan work. If not, it it will be time to start considering your Plan B options.

Assuming that you find a way forward then move on with the next two steps.

Step 6: Get Cash Fast

Be relentless in collecting any outstanding debts. Customers may be in the same situation as your business so ensure you are at the top of their “to pay first” list.

Pursue all the possibilities of getting cash in fast: 

  • Online sales? 
  • Sell any slow-moving or excess stocks?
  • Identify and sell any redundant assets which can be turned into cash?
  • Collect any outstanding personal or business loans?

Step 7: Staff Discussions 

It’s now time to brainstorm solutions to minimise the impact of the staff reduction decision on the staff.

What can be done with the excess staff? 

  • Could they be relocated in the business in a lower level, lower paid position?
  • Is it possible to assist staff who have been impacted to build their own business? 
  • Could their role be suited to the gig economy? 
  • Are there other businesses in the area that could use their services on a part-time basis? 
  • Is there any staff eligible for early retirement? 
  • Eliminate the redundant “baggage” the business has been carrying through the good times?

Having considered these options, it is time to address the final hurdle. Having a one on one discussion with each affected staff member – it is important to to note that this also is not an email or WhatsApp message solution. 

In the one-on-one discussions find out whether they have any ideas, options or suggestions? Have they been planning to leave? 

Action: After completing this process make any final adjustments to the Step 1 cash flow summary.

Relentlessly execute the plan!

The Final Step in Cash Flow Forecasting

Cash flow management and forecasting is probably one of the most critical tasks in any SMB. Use this exercise to build the process as an essential element of the ongoing business system. Consider it as the business thermometer to measure the sustainability risk in the business. 

Even if the business appears to have sufficient cash there are many situations which can accelerate the cash burn and quickly turn a business from safe to critical.

For this reason, as soon as the immediate crisis has been averted use the opportunity and the saving to rethink the business. To reduce risk, increase profitability and build a cash safety reserve. 

Patrick Millerd

About the author

I help small and medium-sized business owners drive success by managing the financial health of their business through understanding the numbers.
Set goals and action plans for cash and profit and customer management.

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