If you run a business, one of the most important pieces of data you can have is a 13-week rolling cash flow analysis. Why 13 weeks? 13 weeks = 1 quarter. You should always know your cash position for at least 1 quarter in advance and you should know that every single week.
According to a recent Forbes article, the number one reason startups fail is a lack of capital and not having sufficient cash flow to fund day-to-day operations like paying employees. Number two and number three are also cash related problems. Having a 13-week rolling cash flow gives you the flexibility that you simply would not have if you only knew of your current cash situation.
What Happens if you Don’t Have a 13-Week Rolling Cash Flow:
Imagine this, it is payday and all of a sudden you are short on cash. What are your options? Hopefully you have some room left on one of your credit cards, a wealthy relative or employees that would be willing to defer their pay. Having a 13-week rolling cash flow increases your financial visibility and allows you to have a multitude of options to handle a cash short-fall.
Short on Cash 13 Weeks out:
Most businesses have fluctuations in their cash position. Businesses that are tied to heavy seasonality are especially impacted based on the time of year. The graphic below shows an example of a 13-week rolling cash flow report and provides the visibility you need to make important business decisions.
Currently this business has over $20,000 of cash on hand and in week 8 will be feeling pretty flush with over $90,000. However, the cash balance quickly plummets over the next 5 weeks.
There are many reasons this could happen. As mentioned earlier, this business might be heavily tied to seasonality, like a retailer during Q4. There might be new hires coming on board or the purchase of new equipment or technology. Payment from a client might not happen until after the company has incurred significant expenses. Whatever the case is you have 13 weeks to find a solution.
Knowing that you will be short on cash 13 weeks from now, there are a number of things you can do to improve your cash position. You could:
– Delay hiring some of the staff you were planning to bring on board
– Land a big contract and have them pay up front
– Put extra effort into cleaning up delinquent customer accounts
– Negotiate different terms with a vendor or two
– Delay the purchase of equipment or technology you have on your roadmap
– Put together a bank package and secure a line of credit
– Eliminate head-count (certainly a less favorable option)
– Secure bridge financing (expensive, but still an option)
Understanding your cash position 13 weeks out should be one of the staples of your business. If you don’t have this visibility today, you should make it your number one priority!
Link to Forbes article: https://www.forbes.com/sites/quora/2015/03/06/the-top-5-reasons-startups-fail/#466c940f97fe
If you would like to learn more about building out a 13-week rolling cash flow analysis, contact NOW CFO for more information.