Cash Flow Analysis

The ProProject Podcast has returned with our 1st episode of 2020. In an uncertain time it is vital to have a clear view of your short-term and long-term cash flow. I will discuss 4 steps to analyzing cash flow that I am currently using to help my clients assess their financial position and risk. 

Tune in for 4 simple steps to review and forecast your cash flow.

Darell Brown:

Welcome to the Pro Project Podcast with Pro Project Bookkeeping. This is your host, Darell Brown, I'm bringing you bookkeeping tips and tricks to make your project finances run a little smoother. Thank you for joining me for the first podcast of 2020. I am coming to you from my living room in Yonkers, New York. While I'm used to working virtually probably 50% of my time due to the changed landscape with COVID, I am now working from home 100% of the time, and this is something that many of the businesses that I work with have to contend with as well. Of course, some of them have offices that they go into, some of them have events that they need a live audience for, and of course, some have job sites that they need to report into and inspect and work with. Once the pause order wasn't enacted at mid-March, it was a very swift change to how a lot of the companies I work with do business.

So while my clients are trying to figure out how to work in this changed landscape, the major question of course, that I would receive is how are the finances? How is cash flow and how can that carry them through this coronavirus landscape. On today's podcast, I will discuss four of the key steps I use to examine my client's financial position. I began reassessing their finances with the goal in mind of accurately forecasting cash flow and then making sure that we have systems to monitor it on a much more constant basis than we would have in the past.

The first step is to review the current cash on hand. How long would your actual cash last? And this is cash that is actually in your bank account. How long would that last against your fixed expenses? So fixed expenses could be your rent, it could be loan payments, it could be salaries, insurance, utilities, but how long would the actual cash that you have in the bank account last against these kinds of expenses? Depending on how long your cash will last, this will dictate what steps you to focus on next. So let's just say for the purposes of this podcast, that your cash on hand would last one to three months.

So the next step would be accounts receivable. What invoices have you sent out that you are expecting payment on? And what are those amounts? It's especially important to review this list for the likelihood of actually collecting a payment. Do you have knowledge of any company on this list who has temporarily closed or even permanently closed or has faced a significant reduction in business? If so, then the likelihood of you receiving payments on that invoice might go down to zero. So you don't want to anticipate receiving payment on that if it's likely not going to come. So if you have open accounts receivables of let's say 100,000 and you found own out that 30% of those are going through a business downturn, then you don't count that 30,000 of receivables that's going through that downturn.

You want your cashflow forecast to actually reflect cash that is likely to come in. So I'm not saying don't attempt to collect on that additional 30,000, but you don't want to over inflate your cashflow forecast with money that may not be paid to you. So examining the first two steps, the current cash on hand will yield a maximum of three months of expenses. And examining the accounts receiver has given an additional 70K of payments that will actually come in and hit your bank account. So let's just say that's in an average month, you have 35,000 of expenses, 70K of likely payments now extends your cash flow forecast by an additional two months for are a total of five months.

The third step is to reexamine your expenses. Some companies I work with have been able to negotiate rent reductions or discounts. Also review your vendor contracts. If any of your vendors are experiencing a temporary shutdown, then are they able to fulfill the terms of your contract? If not, you may be able to negotiate a temporary suspension of any monthly fees that you might pay for those contracts. I've seen anywhere from a 10% reduction to a 30% reduction and monthly expenses, depending on the situation. So again, at 35,000 of monthly expenses, a 30% reduction is nearly $11,000 reduced in your monthly expense. So this reduction now stretches your cash flow from five months to potentially seven months, because now your monthly expenses are about 25,000 per month down from 35,000.

The last step is to review your signed contracts. The same way you needed to review your vendor contracts to see if the work could still be performed, you need to review the contracts that you have with your clients to make sure that you can still perform the work. Again, we need to look at the contract, the contract terms, the payment terms, and assess if you're still able to deliver that work. If you are able to still deliver that work, then the next question becomes what's the likelihood that your client is still able to make payments and make payments on time. Once you have this information, then this again goes into your cash flow projection so that you can forecast your cash flow beyond the seven months.

While the prior steps have more been concerned with business steps you might have already done and reducing expenses, step number four is more towards your continued operation and making sure that your business can function and meet financial obligations going forward. So once I've assessed these four steps, I usually create a cashflow dashboard that business owners can review to really plan what their next steps are. In some cases, I've gone through these steps multiple times and created multiple cashflow scenarios to give an idea of what the best-case scenario would look like and what the worst case would look like.

And because we're in an unpredictable business landscape, it would be ideal if these scenarios are viewed on a regular basis. Depending on your cash flow position, start with once a week and then kind of move from there depending on how comfortable you feel with your cash flow forecast. To recap the four steps, you want to start with viewing your actual cash on hand. So this is the actual cash that is currently in your bank account. Next, you want to review your accounts receivable, so these are invoices that you've already sent out to clients that you're expecting payment on. And you want to do this with an eye towards payments that you are definitively going to receive. Next, you want to review your business expenses and see if you can negotiate any reductions or suspensions of payments for the foreseeable future. And lastly, you're signed contracts, you want to make sure that you're still able to perform those services and that the clients of those contracts are still able to pay for those services.

Once you have this information, you can assess your financial risk, your financial need and the continuation of your operations. So that's a very shortened view of what I have been doing for my clients since the middle of March. I hope this has been helpful to any businesses needing some steps on how to assess their finances. And of course, if you need more information, reach out at info@proprojectbooks.com. Once again, that's info@proprojectbooks.com. Also, if you need any additional financial tips or assistance due to COVID, please visit our website at proprojectbooks.com. We offer free consultations and we'd be happy to talk through any hardships or financial questions you have during this time. This is Darell Brown signing off. Before I sign off, I would like to note that even though we're going through a difficult time, I've seen some small businesses after taking some time to reassess and adapt are absolutely thriving right now. So I do hope this episode has been a catalyst for you to reassess your finances, reassess your operations, and to find a way forward. So this is Darell Brown officially signing off this time with the hope for your continued business success.