Chapter 5 -
Forecasting cash flow

Whether you’re expanding or just carrying out your business plan, forecasting and budgeting cash flow are essential skills. The main objection often is, “I can’t predict my customers’ needs, so it’s difficult to make projections.”

That’s true, particularly for the owners of small companies, who face so much competition for time and resources. Forecasting takes discipline and time that people don’t seem to have. Yet most businesses get into cash flow trouble because they can’t see the trouble coming.

If you don’t want to be a casualty, at least try to forecast your cash flow. A poor forecast is better than none at all. And by practicing and comparing your actual results to forecast, you will get better over time.

If you want to grow, you need to know your cash position weekly over the expansion period. This chapter explains how you can set up the tools you need to forecast and budget your cash. After you understand the concepts of forecasting and budgeting, you will need reports on forecasting your cash position to help you make decisions. Chapter 11 addresses how to systematically produce regular cash flow reports for the normal operation of your business.

Since most cash flow trouble happens during expansions, this chapter could be called: “How do I expand and not go broke?” This chapter walks you through a sample expansion scenario.

Assume your company, CCU Trucking Co., will add 10 tractors and trailers at a purchase price of $100,000 for each tractor-trailer combination. You put down 10 percent and finance the rest at 10 percent for five years. Assuming normal operations, your annual fuel and maintenance costs, start-up and other expenses are as itemized in Table 5-1. Finally, all new trucks will produce annual revenue of $100,000 with an average 45-day receivable-collection period.

Plan to expand; don’t just do it. The name of the game for expanding is plan, plan, plan. You need to know all costs and assumptions as part of your expansion. If your customers don’t explicitly drive the expansion, make sure they will support your additional trucks with more freight.

Research the various equipment choices and financing options. Don’t let the pressure to meet customer demands for capacity push you into buying another truck – or 10 more – tomorrow without realizing what you’re getting into. That’s a recipe for disaster.

Gather your numbers and break them down. You need all the information you can get, and you need to have it in manageable pieces. Table 5-1 lists the minimum number of categories you will need. If possible, break these categories down even further.

Profit-and-loss and cash flow are not equal. As discussed in Chapter 3, cash flow follows profit over some lag time. Projecting the P&L is only the first step in deciding whether an expansion makes sense. You must convert that P&L projection into a cash projection. Break the numbers into progressively smaller increments – annual, monthly and weekly. Concentrate on the weekly cash flow forecast.

Run your projection
Once you have the key numbers, you should run a cash flow projection for the expansion. To keep things simple, we assume in Table 5-2 that you start withsome operating cash and that you have the trucks running at capacity instantly. As you learn the process you can adjust those assumptions.

Notice the tremendous drain on cash that an expansion of 10 trucks has onCCU Trucking. The cash balance dropped from $200,000 to $30,850 in just five weeks. Only $100,000 of this drain was from the down payments. The remaining $69,150 was from an investment in expenses to get the cash flow pipeline filled up with future revenue.

And this sample projection assumes nothing goes wrong. What if, for example, you could not book all the trucks instantly? In the real world, you would assume some “ramp up” on the revenue. Your cash investment in such an expansion could quickly exceed $100,000 on top of the down payments.

In this example CCU Trucking Co. was in such good financial and cash shape that it did not require additional resources from the owner. This example also assumes that CCU Trucking Co. could obtain a $900,000 loan at a fixed rate of 10 percent. That’s feasible if you have CCU’s balance sheet, but is this practical for you? Unless your company has $200,000 in cash sitting around, you probably would need additional owner-contributed capital to add 10 tractor-trailers.

Leasing the tractors and trailers could conserve the down-payment cash, but the leasing companies will figure a return on their investment into the lease price. Even with no down payment, expansion takes cash early on. You must prepare to bridge the gap between negative and positive cash flow, a period that might last eight to 16 weeks.

Save cash first
CCU Trucking Co. could pull off its expansion because it had a stash of cash. Some people believe that expansion will instantly produce cash because they assume receivables will come in faster than they must pay out expenses. You can’t necessarily count on that situation, so the first step in planning to expand is to begin stashing away money into a designated expansion account.
The cash reserve will serve two purposes. First, it obviously will help you through the expansion itself as you are spending more cash than you are bringing in. Second, your banker will be more likely to help during your expansion if you have shown that you are willing to dedicate your own cash to the deal.

One way to save cash is to put off other projects. Certainly you shouldn’t plan some other new venture – building your own shop, for example – while you are putting new trucks into service. Even small initiatives can divert meaningful resources from pursuing the customers or loads necessary to move the fleet expansion into positive weekly cash flow.

Be conservative and use ranges. Using optimistic numbers may give you more confidence, but they won’t do a thing for your checking account when your plans run into inevitable snags. Always use conservative numbers and use ranges of numbers if possible. Create a best-case scenario and a worst-case scenario.

Compare actual with projected. Whether you are in expansion mode or just running your usual operation, you should compare the previous week’s actual results with projected results. This exercise is important in keeping the company running, and it’s useful for adjusting future projections. Have your bookkeeper or accountant provide updated numbers as often as possible. Look for warning signs, and, as with any other key management matter, consider your options regularly.

Expanding your projections
You can easily adjust the cash flow projection for an expansion to cover your entire operation. A cash flow projection is a weekly P&L adjusted for non-cash items. In place of depreciation and interest, use your full debt service. This may make projecting weekly cash flow sound simpler than it really is, but it’s not rocket science, either.

In Summary
A huge jump in business will require major cash injections, either from company reserves or company owners. Gaining the discipline to forecast your weekly cash flow for expansions will help eliminate surprises. And you’ll gain the discipline to begin routine budgeting and cash flow projections that will be useful all year.