Avoid cash flow catastrophes: Improve your forecasts

Remember Borders books?

Or Circuit City?

How about Pan Am Airlines?

Each of these once-highflying brands is now gone or radically changed because their companies eventually ran out of cash to pay bills.

But it’s not just big companies with declining sales that run into problems with cash flow. Talk with any accountant or other financial expert and you’re likely to hear a story like this: “I had a friend/client/relative who was very profitable but who grew themselves into trouble when their cash couldn’t keep up with their increasing expenses.” Or, “I had a friend/client/relative who was very profitable but who let their accounts receivable get out of control, and their business imploded. And it was ugly.”

These professionals know better than most that businesses can run into trouble when management doesn’t pay close attention to cash. By knowing exactly what cash you have coming in and going out and when those transfers occur, you ensure you have enough cash to continue operating from day to day. A key to making sure you don’t get caught by surprise is knowing what cash you should have coming in and going out — in other words, having an accurate cash flow forecast.

“If you don’t want to get into a liquidity crisis and lose your company, you have to do a cash flow forecast,” says Rebel Cole, professor of finance at DePaul University.

There are other, often related, reasons to improve your cash flow forecasts:

• To be prepared to apply for a loan

• To make sure you can fund future growth

• To know you can save for a rainy-day expense.

But many financial professionals and business owners struggle with cash flow forecasting. Why is that?

By their very nature, cash flow forecasts can be complicated, according to Brandon Otis, a manager in the Business Valuation & Litigation Support Services group of Pittsburgh-based accounting firm Alpern Rosenthal. Professionals who generate them on a regular basis say that forecasts change from year to year because the economy changes, various rates used in estimating items change, and there can be changes tied to new legislation, market dynamics or industry trends. “While a financial manager like me would be able to ask the questions, we have to work in tandem with business owners to understand all the aspects related to different businesses,” Otis says.

In upcoming posts, you’ll get advice from experts on options for generating a forecast, hear recommendations for how frequently your forecast should be reviewed and learn more about acceptable levels of cash to maintain. You’ll learn how cash flow forecasts can go wrong and get tips for improving your forecasts. You’ll also hear of additional resources that are available, including some benchmarking tools to see how your cash situation compares with other companies in your industry.