How to Make Sure Your Company Has Enough Cash All Year

Article by Peter Cohen, Founder, Peter S. Cohan & Associates
Every business owner knows that Cash Flow is the life blood of any company. Here is a GREAT article to show you how to ensure you have adequate cash flow all year and never bleed out.
At Babson College, I teach many courses–including Foundations of Entrepreneurial Management. One of the most important foundations for a startup is doing a good cash flow forecast so you don’t run out of money.

Cash flow forecasts are not just for startups. Many years ago, my job was to build and update a monthly cash flow forecast for a $6 billion global insurance company.

When I did that job, I tried to find the company’s best experts on each of its sources and uses of cash and asked them to do their best to provide me with monthly forecasts of each part.

Each month, we would compare the actual results with the amount forecasted and tried to learn from our mistakes to improve our next month’s forecasts.

Once your company gets beyond the early stages, you can apply the same approach I did.

But for an early-stage startup, you ought to take charge of the cash flow forecast and know all the numbers yourself. Here is a five-step process to make sure your company has enough money to last the year.

1. Total up your cash resources

Before you begin your cash flow forecast, you ought to take a look at your cash resources. Your current cash may come from founders’ savings, friends, or family, grants from government or business-plan competitions, profit from your business, or the willingness to borrow against your credit cards or assets such as your house.

Once you know how much cash you have, you can begin the process of analyzing how quickly you will burn through it.

2. Identify sources and uses of cash

At the early stages, a company typically has no cash coming in from selling products or services but is spending money to build its product or fielding a sales force to gather input from potential customers and ultimately to sell the product.

Before you can estimate how much cash you will generate and how much you will spend, you ought to identify the specific variables you’ll need to forecast. For example, to develop sources of cash information, you will need to know the number of product units you’ll sell and the price you’ll charge customers.

And to estimate the uses of cash, you will need to forecast items such as the cost of each product unit you will build and sell, the number of employees you’ll hire and how much you will pay them each month, the cost of inventory, rent, utilities, insurance, employee benefits, I.T., marketing, shipping, and many others.

3. Estimate how much cash you’ll generate and spend each month

The next step in forecasting cash flows is to put a value to each variable.

To do that with reasonable accuracy, you should work with your accountant or your chief financial officer. These experts should get price quotes from suppliers and human resources specialists so that your forecasts of monthly sources and uses of cash are as accurate as you can make them.

Once you get the numbers, put them into a spreadsheet–but leave room for another cost item.

4. Add a contingency

The other cost item is what I call a contingency fund. That’s important, because things in a business generally end up being worse than you expected. It takes longer to build the product, customers delay purchases for reasons outside your control, and once they do buy they demand bigger discounts than you expected.

One way to estimate how much of a contingency you need is to add up all your uses of cash and multiply the total by 10 percent.

5. Extend your available cash or raise more

Once you’ve entered all these numbers into a spreadsheet, you can calculate whether you have enough cash to last the year.

If you don’t, you should consider whether there are ways to reduce your cash burn rate. For example, you could delay hiring a sales force or you could work out of your apartment instead of renting office space.

If you still don’t have enough cash to last the year, then you will know how much you need to raise and you should get started right away.

But if you do have enough cash for the year, then you can turn your attention to the hard work of making your cash flow forecast real.

By Peter Cohan

Founder, Peter S. Cohan & Associates