Keep the cash flowing

John Lauber

“News reports tell us the recovery is here. Unfortunately, rather than a straight line return to robust growth, I expect most of us will see a saw tooth recovery (a series of activity spurts followed by quiet). It will be important to maintain the spending controls that got you through the downturn and not get ahead of yourself. Revenue assumptions based on reality are critical. This is not the time for ‘stretch goals.’ You can use these to motivate your sales force but not to manage your critical cash resource.

“Two helpful tools are: a weekly activity/flash report; and a backlog-driven financial model. On a weekly basis, identify and track your key metrics; orders, new customers, proposals, inquiries, etc. – whatever gives you visibility and drives future revenue. Some large companies provide their vendors with a rolling sales forecast. Rank outstanding proposals by probability of closing and most importantly, keep in touch with your customers. Use this information as the basis to realistically project revenue and drive your financial forecast.

“Now your backlog driven forecast will be more realistic, allowing you to use it to anticipate workforce levels, raw material purchases, capital expenditures and cash needs. At a minimum, your forecast should have ‘what if’ capabilities and include monthly assumptions, income statement, balance sheet and a cash forecast. It will serve as a tool to communicate where you are to employees, lenders, investors and other stakeholders.

“Reporting actual results against your backlog driven financial model and investigating deviations is a critical piece of this process. This is not a ‘finish and put it in the drawer’ project. To receive the most benefit, you need to constantly refine and update for changes in assumptions and business conditions. Remember, cash is tightest during periods of growth. Let’s hope your cash is tight for the right reasons.”