Run it like a turnaround (before you have to), Part 3: Managing cash flow

Editor’s note: This is the last in a three-part series on how healthy companies can unlock hidden benefits by taking a page from the turnaround management playbook.

In our previous blogs, we discussed operational analysis and expansion planning as it pertains to unlocking capacity and growth. In this installation, we focus on the projection, timing and tracking of cash flows.

More in this series 

Part 1: Generating Profits

Part 2: Expansion and acquisition

How can you hit a target if you’re afraid to create one?

The 13-week cash flow forecast is the industry standard for basic performance measurement in a turnaround situation. Every cash inflow and outflow is matched against projections, with variances (positive and negative) scrutinized for the underlying causes. This tool provides an enhanced level of transparency into a company’s performance, which is at the same time crucial for management and demanded by creditors.

When applied to a healthy company, the 13-week cash flow forecast allows management-enhanced clarity and transparency at a granular level. This can lead to quicker, more informed decision-making in both the core operations and expansion initiatives. This level of clarity, starting at the C-Suite, can be pushed down into the entire organization, unifying all manager-level employees with a common language.

The 13-week cash flow forecast can roll forward on a weekly or monthly basis, creating benchmarks for monthly tactical reviews and quarterly strategic reviews. Essentially, it becomes the core tool to benchmark a company and its management against an agreed strategic operating plan, with factual data forcing accountability for performance.

Implementing and tracking

Tracking actual performance to projections is a powerful indicator for your business. It provides a crucial level of awareness, giving you the opportunity to detect problems, recognize strengths and evaluate initiatives. Without some form of tracking versus projections, you’re really on a road trip without a map: no destination and no evaluation of progress towards the same.

Cash inflow projections are based on detailed knowledge of your operational capacity, sales cycle and customer pipeline. They should reflect what you can realistically expect your system to generate: known customer demand, order backlog, production capacity, inventory, length of the sales cycle — all these factors must be carefully considered in creating your revenue projections.

Remember that you’re not just projecting revenue — you’re anticipating when cash will actually hit your bank account and be available for use. Cash inflows that fall short of projections provide notice as to a host of potential issues, including operational and/or production, sales efficacy, customer demand, and customer solvency (collections).

Alternatively, cash inflow actuals deviating substantially to the upside alert you to issues such as market demand and “sweating” assets, potentially indicating the need for expansion and investment. In either case, deviations from projections can be given immediate attention rather than delaying or ignoring issues due to ignorance or untimely knowledge of them.

Cash outflows are created based on when you anticipate the actual payment of expenses. Factors to be considered are escalations (think rent and inflation), anticipated equipment and/or asset purchases, and hiring initiatives. If you pay expenses with a credit card, those payments should be considered cash outflows — money that has essentially left your bank account and is no longer available for use. Actual outflows that exceed projections could be an indication of a lack of grounded operating knowledge, inefficiencies, supply chain issues or a lack of proper controls.

Timing and allocation

It’s also important to get the timing of cash flows right. Every business essentially matches cash inflows to outflows, with the goal of being able to meet obligations as they come due and to calculations of IRR. Cash that comes in later than expected can cause a lot of heartburn when outflow obligations materialize, leading to ad hoc cash management that diverts cash from other pre-planned activities.

Cash flow mismatch also communicates to investors that you don’t have a solid grip on your cash management, eroding confidence in management and the business in general, potentially resulting in valuation discounts.

Projecting future cash balances allows you to plan for capital allocation and anticipate financing needs. Accurate cash flow forecasting shows lenders/investors/buyers AND current shareholders (including yourself) that your company is tightly run and it instills faith in your management acumen.

Perhaps most critically, a well-executed cash flow forecast creates a level of fact-based understanding of your company’s operations that can be used as benchmarks for accountability for you and all those in executive or management functions.

The bottom line is that as a business owner, you must have deep knowledge of how both cash and work flow through your business. Lack of visibility on either of these key aspects leaves you vulnerable to very unpleasant, yet very avoidable surprises.

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Related Resources

The 10 Essentials of Scalability 

What’s Better: Cash Flow or Asset-Based Borrowing?

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