No Cash, No Carry

I love saving money. Not just savings bank kinds of saving – good-deal kinds of saving. I’ll go a couple of months without buying toiletries so that I can stock up when CVS gives me a 25% off coupon. Of course, I have to buy a package of gum and give them my ExtraCare card in order to get the coupon, but I like to think that I’ve figured out their system, and I have no doubt but that they’ve figured out mine.

You do that enough times over the years – whether you’re looking for the best price for gas, or going around the block a couple of times to find an open meter instead of paying garage rates, or even buying cheap standing room tickets at the ball park and poaching into the players’ wives’ section behind home plate – you do it enough and you think it should add up.

And it does add up, but so do the actuarial tables: the longer you live, the longer you can expect to live. So what once looked like a goodly sum of savings to get Annie and me well into our dotage (and beyond!) now has a couple of question marks next to it: As we live our longer lives, how many years are there to the Great Beyond? And as the interest rate on T-bills continues to fall short of the inflation rate, what’s a conservative investor (which I’m now supposed to be) to do?

Enter the financial advisor’s financial advisor. Yes, it’s true. I have a financial advisor. Where else would I get objective advice? She gave it to me: if I wanted to keep working forever, our cash stash likely would last forever. But even though I like to think about these things as I did as a teenager – that I’m immortal – I really do know better. I can do the cash flows and the sensitivity analyses myself. I just need accountability, and her professional insights about investment alternatives.

So it is with the majority of small companies – they manage for profits, but they live off cash. As their financial advisor, I spend some of my first hours on each new engagement with them tracking receipts and disbursements, cash in and cash out. “Who did you receive money from?” I ask. “What did they pay you for, and how long did it take them?”

On the check-writing side, “Who did you pay, what products or services did you buy, and how long did you take to pay them?” Line by line, right down the general ledger detail for last month. Then we’ll do the same thing for the current month, looking at what’s been received and paid in the month to date and what’s projected during the rest of the month. The net of it all is a rough cash flow forecast, which for many smaller companies is the first time they’ve had such a tool.

This lack of cash awareness isn’t typically an issue for new companies. In fact, the newbies are often fixated on cash, hoping it will last until their first big sale, or wondering how long it will be before the founders can draw a paycheck.

Instead, it happens once companies have begun to turn a profit. “Ah, we’re making money. We’ve proven the economic model. Now we can spend to accelerate the growth curve!” And off they go.

Some weeks/months/years later, the bookkeeper, or the staff accountant, or the controller (who should know better) comes in to the president’s office and says, “We’re going to be short on cash for payroll next week without a big check from X.”

Presidential panic: “What about the bank?”

“We’ve tapped out the line.”

“Can we stretch the vendors?”

“We’ve already done that – we’re not paying anyone, and they’re getting antsy.”

“Can we discount our receivables to get immediate payment?”

“We can, but it comes right out of the bottom line…”

It doesn’t take a crystal ball to put together a cash flow forecast. All you really need is the back of an envelope, though an Excel spreadsheet will neaten and immortalize it. All of the necessary information is readily at hand:

  • The accounts receivable aging statement – how much are you owed, by whom, and for how long?
  • The accounts payable aging statement – everyone you owe, by date of their invoice
  • Standard payroll expense, including payroll taxes
  • Regular fixed expenses – ones that you pay every month, usually without an invoice (rent, insurances, bank loan, leases, etc.)

For cash receipts, estimate the week in which you’re likely to collect on each outstanding invoice, based on your experience with that customer. Do the same for each bill you owe, prioritizing payments not only on the age of the invoice but on the importance of the vendor’s product or service to your continued operation. Then estimate your payroll, making certain that you account for it in the week that the funds are impounded via your payroll service rather than relying on the payroll date. Finally, go through last month’s checkbook and decide how long you can stretch the payments of those fixed expenses.

The segments of your spreadsheet (or the back of your envelope) should look something like this for each week:

  1. Beginning cash, plus
  1. Total cash receipts, less
  1. Payroll and payroll taxes, less
  1. Total accounts payable disbursements, less
  1. Fixed expenses paid, which equals
  1. Ending cash.

Using your aging statements, you can spread this for six weeks, assuming that most of your receipts and disbursements take at least 42 days to turn around. Otherwise, adjust for cash deposits or 30-day terms on either receivables or payables that are not yet included in the aging.

This seems elementary, and it is simple. Yet owners and presidents lie awake nights wondering if their cash is going to run out this week or next. You don’t have to wonder – lay it out! Then, if the ending cash number is consistently black, you’ll sleep better. If it’s not, give me a call. By the latest actuarial tables, I’m still well short of my dotage, which means that I’ll eventually be needing the cash.