Cash Flow Planning is Tricky but Critical

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Earlier this month, I had the chance to be a guest speaker on the topic of cash flow planning for business owners, at a Kauffman FastTrac class.   It’s an area of financial management that many business owners find particularly difficult to get their arms around, including Brian LaGette and Ron Wilson, two Wharton graduates, and the founders of what Inc. Magazine described as “The Company that Grew Too Fast.”   

Their company got its genesis as a Wharton class project in 1994-95, and was eventually named 180’s. They experienced explosive revenue growth, increasing from $1 million revenue in 1999 to $15.4 million in 2001, but were not able to finance that growth in sales of ear warmers and other products, and were eventually acquired by Patriarch Partners, a private equity firm specializing in distressed debt.   One aspect of their downfall was that they failed to foresee and plan for the additional working capital demands, both inventory and accounts receivable, from expanding their sales from sporting good stores to department stores.

Business owners looking to build and use a cash flow model for their business would be well advised to remember the following:

  1. Give a lot of thought to your sales forecast, as this is a key element to accurately forecasting cash flow
  2. Understand your working capital ratios, how they change seasonally and with business growth, and what that means in upcoming quarters
  3. Try for a model that is detailed enough to be accurate, but not so complicated that you will avoid using it
  4. Back test the model on your past quarters’ results to validate it, before relying on it to project the future
  5. If no one on your team has the ability to do this kind of modeling, think about tapping an outside resource to help with the development, implementation and interpretation of cash flow model results

When done right, a cash flow model will help you forecast the need for additional cash in time to act, and it may even help you make decisions which lessen the need for additional cash to run your business.