All the more reason to forecast cash flow and other key account balances
You know you need cash to operate your business, including a reasonable amount of cash reserve. You can suffer losses, perhaps for an extended period of time and continue to run the company, maybe even grow the business, but the minute you run out of cash you may have no choice but to close the doors.
What I am referring to in the title of this article is the cash account balance showing zero ($0.00) on the balance sheet, perhaps for a long time. Maybe this is the only way you are able to operate. I am not suggesting running a company without using cash, just the phenomenon, which is quite common, that each accounting period end, the cash account balance refuses to rise above zero or is omitted all together on the balance sheet.
The explanation to this is quite simple. The company has a line of credit (LOC) and all deposits into its operating account are swept daily into the credit line account to reduce its balance. Similarly, all operating cash account overdrafts are funded by (sometimes daily) drawings from the credit line.
If the credit line has any substantial balance, you may not see any cash balance on the asset side of the balance sheet. In fact, you may need to manually reclassify any negative balance in the cash account to a current liability account, usually named Book Overdraft. Since this is not a lesson in accounting or financial statement reporting and most, if not all readers, already know this, I will not elaborate here.
Most business owners and senior managers realize that one of their most important tasks is to plan and forecast their cash flow, then monitor and control it (payments to employees and vendors, collections from customers, etc.).
Cash flow forecasts are critical as they forecast a company’s cash position in future periods, and in this popular case of using a line of credit, where that LOC balance is going to fall at the end of each period and the expected interest expect in future periods.
Important questions to ask:
- How much will you be able to draw from this LOC and when?
- Will you be able to reduce the balance in certain periods?
- Should you plan on increasing the limit of the LOC or look for other ways to finance the business?
So, you need to seriously start performing cash flow planning and budgeting, but you need capable tools to properly do this job, namely, harnessing the power of current FP&A software applications. Just make sure the application can provide you with a complete and accurate forecasted Balance Sheet like your actual balance sheet.
The forecasted balance sheet must always be synchronized to the forecasted Income Statement, which is derived from the budget, so you must make sure the software application can really support that. One way to tell is when the software has built-in business logic and accounting rules and does not require you to program formulas, functions, and links. I urge you to spend time looking at these key features in the various available solutions and selecting one that offers these features without compromise.
A forecasted Statement of Cash Flows will also be very helpful in identifying where cash is going and where it is coming from. This statement should, of course, be synchronized to the forecasted income Statement and the forecasted Balance Sheet.
I’ve been asked many times if adding Balance Sheet and Statement of Cash Flows budgeting to the already busy schedule is going to add a lot of work and what the real benefits are.
The logical answer to this question is:
If you choose a solution where the Balance Sheet and Statement of Cash Flows are already built in and synchronized to the Income Statement and all the business logic and accounting rules are provided by the software, you will not be adding any additional work to your already busy schedule.
In contrast, you will notice that this will free up much of your time to do a lot of the needed analysis work. You will, however, need to perform a one-time setup which is expected when a new software solution is implemented.
It’s OK to run a business with zero cash on the balance sheet. Just know what your current and future cash flow looks like and what cash resources you can tap at any time. Then make your FP&A software solution your best friend when relying on this vital data.
Alan Hart, MBA, is Principal Consultant at Pacific Shine Group in Portland, Oregon, with responsibility for client business development and hands-on client project implementations. Prior to starting Pacific Shine Group, he worked in various executive accounting and finance positions with technology and growth companies. Notable is his 18 years in the hi-tech manufacturing industry where he served as Controller, Vice President of Finance and CFO of several privately as well as publicly held companies in the Hi-Tech industry, such as Hybrid Arts, Inc., Hamilton Bay Associates and Syncronys Software. In his role in management consulting, Alan has worked in diverse industries and with a variety of clients, including fortune 1000 companies such as Boeing, Delta Airlines, Intel, Wyndham Worldwide and others, as well as many mid-market organizations such as Guitar Center, Ducommun AeroStructures, Cypress Semiconductor, TriQuint Semiconductor and others.
Combining his skills and experience in engineering with deep understanding of technical accounting, he can assist small and medium-size manufacturing companies establish GAAP compliant accounting and reporting systems.