Around The Bend
Businesses Need To Forecast More Than Cash Flow
What’s going on in your business?
How is your business’ cash flow?
Are you making money?
Are you burning through cash?
Do you have any idea what happens with each quarter? What does the next quarter — yes, 13 weeks, have in store for the business?
Cash Flow 101
On the cash flow variable side, there are three things that result from operating a business:
Building Cash, Burning Cash, Breaking Even.
Businesses and their accounting departments are seldom aware of 13-week cash flow models and the value they can bring to forecasting, managing and just getting an overall perspective on how the business is tracking, until it’s often on a slippery slope. It amazes me that even healthy companies, and their CFO’s and controllers, don’t do this as a matter of practice.
The point of a 13-week cash flow model is to forecast how much money is anticipated to come in each week (inflows), how much is anticipated to go out (outflows) and the net change in cash in a given week, and, then, over the rolling quarter.
Ostensibly the 13-week report changes every week, so next week, this week drops off and a new week is added on the tail end, so that at a moment in time, the company has the benefit of a rolling quarter to project and forecast what’s likely to happen.
Cash Flow Is Only Part Of The Story
Yes, the cash flow monitoring is only part of the story.
In companies, failure and difficulty is almost always universally behavioral. It can be as much about what wasn’t done as about what was done.
But the simplistic accounting/forecasting view of cash flow projections represents partial, or incomplete, information. What’s equally important are the events, the situations, the customer behaviors, the employee variables, and other, external variables, that determines the most important thing of all: what’s going to be happening.
All of the inputs to the business need to be isolated, quantified, but most importantly, understood.
It’s important to write a narrative to accompany the direction the business took this week, and will likely take, next week. Publicly held companies typically have something in their annual report to stockholders called a “management discussion and analysis” or the “MD&A.” It’s a retrospective summary put into a narrative to tell the story of the company.
The real challenge, and the real opportunity, is the ability to know with a high degree of confidence or certaintly, what is going to transpire, so the company can “write the story” going forward.
Writing a history book is much easier than fortune telling.
True 13-week cash flow models with narrative, which are honestly and accurately prepared can enable owners and managers to look into the future and clearly assess whether cash is being earned and accumulated or used/consumed and answer questions like why, when, how, how much, how often, e.g.
The Road Ahead
Properly tracking cash is essential, but perhaps less essential than management having an understanding of operations, and a mastery of all of the complex interrelationships of the activities in the business.
A properly narrated and objectively prepared cash flow that tells the story behind the numbers, is more like driving with navigation and GPS and less like driving without headlights.
It’s much more important to look through the windshield, than in the rear view mirror, and the trip is easier to take when the roads are more familiar, and there’s a clear idea what’s likely to be around the bend.
Copyright, 2021, QORVAL Partners, LLC and/or Paul Fioravanti, MBA, MPA, CTP. No part of this article may be reproduced, shared or distributed or posted in any form without the express written consent of the author. All rights reserved.