The tale of the 3-legged Stool and Cash Flow

 

Cash flow is the life blood of your business.  How many times have you heard “We’re profitable, but we have no cash?”

 

You Can’t Spend Profits

So every business needs to do three functions to optimize their Cash Flow model and therefore have the most accurate view of their runway. Failure to properly to do one process (leg) of the three will cause you stool to wobble, lean or even fall.

Realistic Budget

You need to start with a realistic budget.  Honesty is the key attribute of this budget.  Pipe dreams, WAGs (wild ass guesses) will only do you, the business, a disservice.  Take your time and develop a budget that compliments your business plan its goals and time table.  If you are a start-up you don’t want to waste money on fancy office space if it isn’t public facing.  You want to take that money and use it for product development, staffing and advertising (and not necessarily in that order).

The best budget length (time-wise) is 18 months.  The degree of accuracy of your budget diminishes at 6 months, 12 months and after 18 months it is, with the exception of contracted prices, a truly WAG budget.

Monthly Re-Forecasts

Once your budget is finalized you’ll want to do this exercise on a monthly basis.  Re-forecast line items where you have gained better insights.  Sales and inventory costs are constantly changing.  Salary operating expenses may change.  You may have better insight into your audit costs or legal issues that have ensued since your developed your budget/last forecast.

Accuracy in your Budget/Forecasts is paramount for accuracy in your Cash Flow model.

Clean Accounting

If your accounting is sloppy, so will your calculation of runway.  Cash flow is based on assumed/actual cash into the business and assumed/actual cash out of the business.  Wrong terms, failure to account for purchases and purchase orders, as well as sales and sales orders.  Not doing expense reports.  All these factors will impact your accounting and that will throw your Cash Flow model off.

Conclusion

If you do anything like clock work, you need to look at your Cash Flow daily.  Sophisticated Cash Flow systems, such as SBA * Consulting uses interfaces directly with many of todays broad-based accounting systems.  We can get an up-to-date view of your runway every day, all day long if needed.  But it is only valid if you make sure the 3 legs are up to date, and most importantly accurate!

Need help with Cash Flow?  Let’s have a conversation.