A Simple Cash Flow Model

A Simple Cash Flow Model
The true measure of the health of any business is cash flow. Long-term planning matters and revenue is critical, but if you have no cash, you have no business. Period. And knowing what your cash position is at any given time is your best reality check. What’s the optimal way to keep your fingers on the cash flow pulse? A solid model.
Your business happens on a daily basis, and staying on top of cash flow can help you when you have those sudden needs—you get a project requiring additional resources, a vendor (or you) decides to change terms, you have a brief window to get an inventory deal, etc. In that case, a “back-of-the-envelope” model can keep you constantly up-to-date regarding your cash on hand.
“A cash flow model doesn’t have to be complex,” says Jennifer Mailhes, CPA, the Consulting Department Partner at CPA and advisory services firm T.R. Moore & Company. “Most business owners are non-accountants, so having an easy system helps. Think of your cash flow model as a ‘cash-in, cash-out’ measurement. You’re thinking about the timing of when cash comes in and when it goes out. Use an Excel spreadsheet to set up half of the equation: your billing to your customers. Just be realistic about it. If your customers typically pay you in 45 days, make sure your spreadsheet reflects that. Segment it into weeks that show when cash will actually be coming in. The second half of the model is your payables or cash out—payroll, utilities, rent, vendor payments, etc. These will be easy to track, as you tend to pay them on a regular schedule during any given month. It’s really just those two numbers. Subtract that cash out from the cash in for each cycle and that gives you a quick, practical look at cash flow.”
Essentially, the model is designed to quickly show you where any gaps might occur in the short term—daily, weekly or monthly. “Having this gauge in place is a great way to keep regular tabs on cash flow,” adds Mailhes. “But if you’re getting into longer-term issues that extend further than 12 to 18 months, like inventory control, you’ll probably need more professional help. But a simple system like this is more about understanding your cash position at any given time than it is about forecasting.”
The review process you implement depends on your business cycle. Mailhes points to one client who has a small staffing service, noting that it pays contractors twice a month, resulting in what she calls “day-driven” cycles. Once you’ve had the model in place and have been using it for a few months, check it against earlier versions so that you can confirm your earlier assumptions and learn where you might have been off. However, once you’ve been using your model and are comfortable with what it’s telling you, says Mailhes, you won’t have to review it against the history.
“Keep it simple and have a cash focus,” she advises. “You may feel that sales mean cash coming in, but it’s more about collections. You need to know what your cash position is when you’re hitting a time of growth. If you’re growing and you have big deals coming in, that’s exactly when you need the cash to support it—not just the potential of the sales you’ve made. A cash gap can be a real problem, and that’s what most people aren’t prepared for. That’s the true value of this simple type of model.”
Once you’ve developed your model, Mailhes adds, it’s a good idea to run it by your accountant or financial advisor to ensure you’re getting off on the right foot and staying on top of your cash flow