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Manage Cash Flow With Accurate, Timely Cash Flow Projections

You can’t always prevent a cash flow problem from occurring, but if you know when it’s coming because you’ve made accurate cash flow projections, you will have time to address, and possibly correct, your situation.

If, on the other hand, you are at a point where you are afraid of what you’ll find if you complete a projection, then you absolutely need to do one now.

The following are steps that can help you prepare accurate cash flow projections so that you can manage your cash flow and make better decisions about your business.

Understand Your Cash Flow

It would be nice if cash flowed much like the tide — coming in and going out on an even and predictable schedule. Unfortunately, cash flow is a bit more complex than that because it involves so many different facets of your business.

Accountants define the cash flow cycle as the time between buying raw materials, converting them into inventory, selling the inventory and, finally, collecting on those sales.

Lag time between each of those steps can cause cash flow problems because, ultimately, the longer it takes to convert your outgoing cash into sales and incoming cash, the more chance there is for a shortfall.

And with residential construction, the cash flow cycle is long and getting longer.

Understanding your particular cash flow situation is absolutely critical to the survival of your business. To survive, you have to make the commitment to do what it takes to never run out of cash.

Know Your Cash Balance

Make it a priority to know your cash balance — it should be as familiar to you as your Social Security number.

Cash balance isn't about what your bank indicates you have in your checking account. Your bank does not have a record of all the checks you have written that have not yet been cleared and are still outstanding.

To know your cash balance, you need to know your adjusted checkbook balance. This means keeping your checkbook register up-to-date — not once a week, but every day.

A lot can happen in one week. Without the correct information, you can make too many bad decisions — promises that you can’t keep, or worse yet, you could write checks that will not clear.

There is no quicker way to ruin your reputation than by bouncing checks.

Gather Your Information

To prepare you cash flow projection, you will need to know what cash is coming in and from what companies or clients, and you need to know what cash is going out and where.

This doesn’t require a crystal ball, but you will need to do some educated guessing. The more thorough and realistic you are, the better prepared you will be.

Estimating when you will be spending cash is relatively easy since you can begin with the bills you already have on hand. To figure out when you will be spending cash, look at your accounts payable aging report — a list of all the bills you owe and, most importantly, when they are due.

You also need to factor in the operational spending that isn’t invoiced — payroll, quarterly taxes, equipment maintenance and similar expenses.

Once you’ve gathered this information, put yourself in a worst-case scenario mindset and include every possible expenditure that might occur. This will help eliminate at least one common cause of cash flow problems — being confronted with a sudden and unexpected expense.

Estimating cash coming in requires a bit more guessing, judgment — and conservatism.

If you send invoices to your customers, you can base it on when they are due, but definitely bear in mind your customers’ individual payment histories. If, for instance, they always pay 15 days late, then you have to assume they will continue to pay 15 days late and adjust the date you expect to be able to make a deposit accordingly.

You also may have to project the closing date to make a better educated guess on when you will receive final payment for a house. With any luck you have an accurate production schedule that you can follow to pinpoint the date.

The wildest guess you will have to make will be when you think a new customer will give you a deposit. Your best way to estimate new deposits is to base your guess on the very recent past. Look at how many deposits you received in the last three months and if the number of deposits has increased or decreased during that time period.

You definitely need to be honest and realistic when guessing about cash coming in. The worst thing you can do is fool yourself into believing that there is more cash coming in than there really is.

Create a Cash Flow Projection

Now it’s time to make a cash flow projection. This is not as complicated as you might think and you won’t need sophisticated software or a staff of accountants to create one.

In fact, a cash flow projection is very similar to a checkbook. While your checkbook is a record of historical cash transactions, your cash flow projection will be a record of future cash transactions.

Your cash flow projection starts with where you are today, adds what cash you expect to collect and then subtracts the bills that you expect to pay. The end result is the cash you expect to have at the end of the period.

You should prepare your cash flow projection for a given period of time, preferably monthly or weekly. When cash is tight, I prefer to prepare my cash flow projections using a weekly format, as shown in Table 1.

Table 1






Beginning Cash Balance





Expected Cash Deposits





Bills to Pay





Estimated Ending Cash Balance






When creating your cash flow projection, organize your bills based on the actual invoice due date, not on how late you think you can pay the invoice. It’s better to show them as due earlier rather than later because if you schedule a bill to be paid a week after it is due and you can’t make the payment, you are already a week behind.

In your cash flow projection, be sure to enter your weekly expected cash receipts. In contrast to invoices due, enter cash receipts later than you expect them rather than earlier. It’s better to be pleasantly surprised by cash coming in early rather than to be disappointed and unable to pay your bills because the cash came in a week too late.

Analyze Your Projection

Now that you have taken the time and effort to create a cash flow projection, you have to use it

 Look at your estimated ending cash balance and determine if and where your cash starts to get tight. Can you pinpoint a period where your balance goes negative and you won’t have enough cash on hand?

The example in Table 1 shows a cash balance starting at more than $89,000 that shrinks to less than $4,000 in four weeks. This may be a problem. With my company, I prefer to do weekly projections over the course of eight weeks. This allows me extra time to be able to address a potential cash shortfall.

You also will want to compare your cash flow projection to your actual checkbook balance during the same time period to determine how well your guesses compare with reality and use these differences to adjust and improve your guesses going forward.

To determine the best information in the timeliest manner, update your cash flow projection weekly. You can’t always prevent a cash shortfall, but if you make the commitment now to prepare a projection and keep it updated, you will never be unpleasantly surprised by a cash crunch. Forewarned is forearmed, so make your cash flow projection a top priority.

Jennifer Elder is a CPA, certified management accountant (CMA) and the chief financial officer for Tiffany Construction and Development Corp. in Melbourne, Fla. For more information, call Elder at 321-259-5001 x110.

Take Control of Your Finances

Accounting & Financial Management for Residential Construction,” available through BuilderBooks.com, is a solid resource for builders, remodelers, developers and contractors that provides detailed information on how an accounting system operates and the basic principles for processing financial data.

To view or purchase this publication online, click here, or call 800-223-2665.

NAHB Has Nearly 300 Resources to Help You Run Your Business More Profitably

Go to NAHB's Business Management Tools Web pages (available to members only) for instant access to nearly 300 timesaving, moneymaking and cost-cutting business resources to help you run your business more profitably. Get guidance on accounting and financial management, business strategy, computers and information technology, customer service, human resources and more.

Resources are added weekly, so bookmark www.nahb.org/Biztools to go directly to these vital business management resources.

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