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Avoid cash flow catastrophes: Part III – Frequency

Mary Ellen Biery
April 11, 2012
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Cash flow forecast frequency: How often should you update?

Lauren Prosser

As with many things in finance, how often you perform or update your cash flow forecast depends on the business and your circumstances, according to Lauren Prosser, manager of advisory services at Sageworks. A retailer that sells many products of various types and with different costs each day would need a more frequent analysis and forecast of cash flows than would a retailer selling a couple of major pieces of farm equipment each month.

Glenn L. Friedman, a CPA and managing partner of New York accounting firm Metis Group CPAs LLC, says that since the biggest business surprises are typically unknown ahead of time, it’s a good idea to provide cash flow forecasts that are as close to real time as possible. “If the bottom drops out, or you don’t make your numbers, you want to know that sooner than later,” he says. 

If your cash flow forecast review is quarterly and you discover something amiss, that’s 25 percent of the year that’s already gone, he says. “That doesn’t give you a lot of time to adjust.” And since most management decisions don’t happen overnight, you’ll give yourself more time to adjust (expenses, income) if you review and adjust cash flow forecasts more often, he says. 

“In an economy that’s tight and volatile, you don’t want to be looking in a rear view mirror,” he says.

Similarly, if you know cash is tight or you have several big customers who are tardy in their payments, you would want to have more frequent checks on your cash flow forecast than if you have a big cushion and regular payers. 

Frequent checks give you more options for adjusting, too, according to Prosser. Small, family-owned businesses often have employees that have been with them forever, and letting them go is the last thing owners want to do. Paying attention to how your overhead and sales are tracking relative to your cash flow forecasts may give you the time for alternatives, such as pressuring vendors for lower prices.

David Douglass, a partner with Atlanta-based professional services firm Tatum, notes that many companies must provide cash forecasts to their lender and must report, often quarterly, to the lender that their performance is meeting minimum criteria. “Without a cash forecast process in place that is updated more frequently than the bank requires, it may be too late for the company to recover from a cash shortage or having failed to meet minimum performance standards,” Douglass says. 

How much cash should I have?

Rebel Cole, professor of finance at DePaul University, says an acceptable level of cash depends on several things. It varies by industry, by size of firm and by how often you have customers who are tardy paying their bills.

Rebel Cole

“You want to make sure you have a positive cash balance every day and every week,” Cole says. “What’s a good threshold? Something that’s positive.”

Companies with late-paying customers need a bigger cash balance.

“Often, you have to pay vendors or rent before you necessarily receive money from customers,” says Brandon Otis, a manager in the Business Valuation & Litigation Support Services group of Pittsburgh-based accounting firm Alpern Rosenthal.  “That’s especially true when you’re dealing with large customers that have a significant amount of buying power.”

That’s why it’s important for accountants, advisors and business owners to work together to take into account all of the aspects related to different businesses, he says.

One way to develop your own goal for cash is to study benchmarks for competitors in your industry.

For example, it’s not surprising that casinos, bingo halls and other gambling industries have a higher average ratio of assets in cash than do lessors of real estate. It makes sense that workers who are facilitating housing sales need to have a lower percentage of cash on hand than would a casino that regularly doles out prize money.

 

Financial analysis of cash to assets

About the Author

Mary Ellen Biery

Senior Strategist & Content Manager
Mary Ellen Biery is Senior Strategist & Content Manager at Abrigo, where she works with advisors and other experts to develop whitepapers, original research, and other resources that help financial institutions drive growth and manage risk. A former equities reporter for Dow Jones Newswires whose work has been published in

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