How do you balance cash flow sources and drivers in a crisis?

These practical tips could be effictive. First, understand where your money comes from—whether it's sales, loans, or grants. Next, pinpoint factors affecting your cash flow, like pricing, inventory, and competition. Use cash flow statements to estimate future income and expenses. When challenges arise, prioritize spending, optimize inventory, and get creative to adapt. Communication is key—keep everyone informed. Finally, improve your forecasting skills by learning from the past, seeking advice, using data, and being ready to adjust your plans as needed.

From my experience as a fractional CFO, it's crucial to remember that while non-operating sources can provide a significant cash influx, they are often not sustainable in the long run. Therefore, a healthy business should aim to have its operating sources cover not just operating expenses but also contribute to growth and contingency plans. Additionally, accurate cash flow forecasting is essential in growth planning as it helps businesses anticipate potential liquidity events and adjust their strategies accordingly to maintain healthy net margins.

To effectively manage your finances, it's crucial to grasp the concept of the cash conversion cycle. This involves carefully tracking the time it takes to sell inventory, collect receivables, and then allocate those funds towards vendor payments and fixed expenses such as payroll, interest and principal payments, and rent. Additionally, it's important to consider non-recurring expenses, including capex spend, and layer those into your financial plan as well. By analyzing all of these factors and optimizing your cash flow, you can improve your overall financial health and ensure long-term success.

Understanding cash flow drivers is crucial for growth planning and maintaining healthy net margins. As a fractional CFO, I often advise clients to regularly monitor both internal and external drivers. This allows for proactive adjustments to strategies, helping to avoid liquidity events. It's also important to remember that while negative drivers decrease cash flow, they can also present opportunities for improvement and efficiency. Negative Drivers = Opportunities

Cash flow can be broken down into cash inflow and cash outflow. Key drivers for cash inflow is timing of collection of the receivables. Some of the major cash outflow drivers are payroll, interest on debt (if any), payment to factories and external vendors. In addition to this, there could be purchase of assets resulting in capital spending which could be a big ticket item in terms of cash outflow. Monitoring the impact of each of these items on cash flow regularly and managing the timing of receivables versus payables can help to stay on top of cash.

As with many things in life, the journey is more efficient and effective if the objective is defined, first. When the objective is defined, so is the range of acceptable outcomes. As with most efforts, the final percentages of accuracy are the most costly. A highly accurate forecast that is not generating a high return on the investment eats up resources that could be better deployed elsewhere.

When building a cash forecast, it's essential to create roll/forward schedules for your key working capital accounts. Understanding the cash conversion cycle is particularly crucial for manufacturing or distribution companies, as it allows you to see how each account relates to the others. Start by analyzing how inventory is converted to finished goods, sold, and the time it takes to collect receivables. To forecast non-inventory "non-PO" disbursements, review your GL activity from the past six months, and identify recurring vendors/payments. Payroll, interest, and principal payments, as well as rent, typically follow predictable payment schedules, making them easier to forecast.

I can't stress enough the importance of a cash flow statement in forecasting cash flow sources and drivers. Often, it's easy to gloss over summarized numbers on the P&L. It's not just about knowing how much money is coming in and going out, but understanding the operations, investments, and financing activities that are influencing these cash flows. This knowledge allows you to make strategic decisions, plan for growth, and maintain healthy net margins. In times of crisis, this understanding becomes even more critical as it can help you balance your cash flow sources and drivers effectively.

To manage your cash flow effectively, it's important to first identify and prioritize paying your critical "vendors”. These may include suppliers who provide essential inventory or raw materials, tax authorities, and of course, your employees. The next step is to try to extend payment terms with suppliers. By negotiating longer payment terms with your suppliers, you can delay cash outflows and improve your business's liquidity position. However, it's important to ensure that your suppliers are willing to agree to these terms and that doing so won't negatively impact your relationship with them.

In a crisis, it's essential to understand that cash flow forecasting isn't just about numbers, but also about the story those numbers tell. It's about understanding the underlying business model, the market dynamics, and how they are changing. It's about being proactive, not reactive, and using that understanding to make strategic decisions. This includes identifying new opportunities, cutting non-essential expenses, optimizing working capital, and innovating to meet changing customer needs. A crisis can also be a catalyst for growth and transformation if managed effectively.

If you have a 13-week forecast, conducting a variance analysis on a weekly basis by comparing actuals versus forecast can be a powerful tool in identifying any discrepancies in your predictions. It's important to factor in any seasonal patterns that may impact your business. While there are numerous variables to consider, starting with a variance analysis can help you uncover errors in your forecasting methodology and make adjustments as needed. By using this approach, you can refine your forecasting accuracy and gain valuable insights that can inform your business decisions.

Cash flow forecasting is indeed a skill that can be honed with practice. However, it's also important to note that it's not just about the numbers. It's about understanding the story behind those numbers. For instance, if you see a trend of increasing sales, it's not enough to just forecast that trend into the future. You need to understand why sales are increasing and whether those reasons are likely to continue. This requires a deep understanding of your business and its environment. Furthermore, don't forget to consider the impact of potential risks and uncertainties on your cash flow, such as economic downturns or changes in customer behavior.

Below are some of the ways to improve the cash flow forecasting skills: 1.Understanding the timing of each cash flow line item 2.Building a rolling cash forecast and studying a quarter a time. Comparing it to actuals and understanding the key variance areas. Focusing on those key areas and building a buffer, if needed can help. 3.Updating the cash forecast on a weekly basis for actuals and forecast if there is any change in the assumptions for cash inflow or outflow. 3.Using both direct and indirect method of cash flow and seeing they tie closely. 4. Understanding the business and a good judgement will definitely help.