Cash Flow
The cash flow forecast is the estimate of cash received and disbursed each month. When a business is growing, cash flow planning and management becomes critical.
Remember: No profit is the slow painful way to go broke, but lack of cash flow is the fast painful way to go broke.
There are four main reasons for cash flow problems in a growing company:
- Sales growth does not come quickly enough for the increase in overhead.
- Accounts receivable absorb too much cash.
- Inventory levels grow and absorb excessive cash.
- Too much working capital (cash) is used to finance a fixed asset.
Ramp-Up
In growing companies, ramp-up is the period of negative cash flow when fixed costs such as labour, rent, leases and advertising exceed any new income.
This concept is critical. Growing companies must know how they will finance these additional costs prior to initiating growth - whether from retained earnings, new equity or bank debt.
- Do a separate cash flow forecast with any expansion - determine the cash needs of the project.
- Do a best case and worst case scenario keeping in mind two rules of thumb - expenses occur right away and are usually higher than anticipated, while revenue inflows begin later and ramp-up occurs more slowly than anticipated.
- Develop a mini-business plan for bank lenders showing short-term and long-term effects of the expansion.
Timing Growth
In seasonal businesses, timing can make a huge difference. Choosing the wrong time to take on the costs of expansion will make you wait too long for revenue growth, causing a cash flow crunch.
If you can't time it right, don't do it.
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