A case study of detailed cash planning using SurvivalWare Cash Planner

Ivan Newton was kind enough to be interviewed about his usage of SurvivalWare to right his business and propel it forward.  His conclusion: “SurvivalWare is the best solution we’ve found that addresses the unique ‘balancing act’ of our small business.”

Here is his story as re-told by Mary Ritley:

Ivan Newton is a franchise business owner who is always looking for ways to improve operational efficiency and profitability. Located in Pittsfield, Massachusetts near Albany, New York, Newton acquired and ran three Kentucky Fried Chicken locations with a partner from 1983 to 1986.   Newton’s role in the business was that of silent partner – investing, contributing ideas, and reviewing profit and loss statements.  By 1996, lack of profits forced Newton and his partner to downsize from three locations to one.  In 2002, when his business partner became ill, Newton found himself taking a more active role in the operations and eventually took over the business in 2003.  
 

The Challenge

While the business always looked profitable on paper, further review of the financials uncovered notable cash flow problems – enough that Newton had trouble paying the bills necessary to keep the business going. He found himself in the situation that every small business owner dreads. He was cash poor.

 

Newton made it his mission to better understand cash flow. He searched the internet for information that would help him understand where the money was going and why he wasn’t retaining more profit.

 

He purchased a variety of software programs that promised to help him understand ratios, make projections, and improve his business. But he quickly became frustrated with expensive “solutions” with complicated applications that offered little more than monthly comparisons. Newton found that these applications didn’t address his fundamental business problem. He needed something much more granular – something that gave him a magnified view of the cash going in and out the door on a weekly, even daily basis. 

 

The Solution

It wasn’t until Newton found an article about understanding cash flow by Rusty Luhring that he began to understand the basics of cash planning and how to better manage his resources. The article offered tips like identifying invoices that need to be paid immediately and those that can be put off without penalty, invoicing clients early, and offering incentives to pay within ten days. Newton found that Luhring was “speaking his language” and was pleased to learn that Luhring also developed a software package – SurvivalWare – that put those cash planning concepts into action.

 

After an online purchase and a simple installation process, Newton found himself up and running with SurvivalWare’s Cash Planner quickly. The interactive solution allowed him to assess his cash situation on a daily basis and made it easy to move numbers back and forth, see the impact of proposed spending, make changes, and smooth out his cash flow. SurvivalWare also offered the ability to convert numbers to charts and graphs that provided a visual representation of cash flow trends. This functionality also made it easy for Newton to share financial information with his operations manager and to understand the critical combination of primary factors – sales, cost of sales, and cost of labor – that drive profitability. 

 

The Results

According to Newton, “We began using the software in earnest three years ago when we found ourselves in a serious cash crunch. Since that time, SurvivalWare Cash Planner has helped us use our cash wisely, prepare for unexpected expenses, and ultimately maintain a higher cash-on-hand balance.” Newton was also able to meet his financial obligations and avoid bouncing checks.

 

The ability to actually see the impact of cash adjustments and the results of anticipated decisions was essential for Newton’s business.  “No other software package we found offered the ability to conduct an assessment of the business and see how things were changing on a monthly, weekly, and daily basis. With SurvivaWare, I can enter in my accounts payable, and based on accurate sales projections, chart my projected income,” says Newton. He also found the online help to be very beneficial. When he needed to speak with a support person, Luhring returned his call directly and solved the problem.

 

What’s Next

Newton has recently installed the beta version of SurvivalWare 2.0 scheduled for release in June. This new version has inspired Newton to experiment with features he had not previously used. SurvivalWare 2.0 has enabled him to categorize his sales vs. only seeing sales as a single number. He can now view his cost-of-sales, identify hot items, see items that are generating the most profit, and decide which items to promote. Newton anticipates this new knowledge of his sales mix will help him further improve his profitability.  He concludes, “SurvivalWare is the best solution we’ve found that addresses the unique ‘balancing act’ of our small business.”

 

 

 

The Pros and Cons of Detailed Cash Planning

This is a series of articles on Detailed Cash Planning presented in a logic order.  To get them to appear this way in the blog, I had to write all the articles first, and then enter them in reverse order.

 

 

Detailed Cash Planning Defined

Detail Cash Planning is just what is says:  a very detailed approach to planning for the cash requirements of a company, and a look at whether it can meet those requirements.   

We call it detailed because it means you literally make a list of every payment you plan to make (check by check) for the next 3 or 4 months.  You start with scheduling everything to be paid on or before its due date.  Then you look at your current cash balance, estimate when each customer will pay you (for those who owe you money), and take a stab at forecasting what you can do in new sales over the same planning horizon.  Your cash on hand at the end of each time period will be the amount brought forward from the previous time period, plus any money you receive from customers (or loans from banks, dollar bills found on the ground, et.), less any payments you make. 

So your objective is to keep cash on hand above zero.  You might have to adjust the schedule of payments to fit your cash flow estimates.  Or, due to a projected shortfall,  you might gain the insight that a pending deal is a “must have” (as opposed to a “nice to have”), and you make appropriate concessions to guarantee that it goes through in a timely fashion.  Sometimes the result of the planning is that everything looks OK for the immediate future, and you worry less, sleep better at night.  Other times, you get a sense of urgency, and make informed decisions about what to focus on.

Who should do Detailed Cash Planning

  • Small vs. large companies
  • Business vs. personal finance
  • Starting out, no history
  • In trouble
  • In transition 

Small vs. large companies

The larger a company you are, the less likely you should be doing Detailed Cash Planning.  Part of it is the sheet magnitude of number crunching required.  Part of it is that cash has a different meaning in large companies.  You are much less likely to run out of it.  Maybe pay a little more than normal to borrow it.  Traditional financial models are usually sufficient, and you get the law of large numbers. 

0 to $ 1 million in sales is the sweet spot for Detailed Cash Planning, although I’ve seen it done in companies with as much as $10 million in annual sales. 

Business vs. personal finance

I’ve had several individuals express an interest in doing Detailed Cash Planning. These tend to be the more technical types.  Simple expense budgeting is sufficient for most, or even back of the envelope calculations.  For an individual, Detailed Cash Planning might help when you are close to being tapped out.  Or if you’re anal and just want to see every dollar spent. 

Small Businesses are the ones who really get the most out of doing Detailed Cash Planning.  Things are a little more complex than for an individual, especially on the cash inflow part of the equation.  The thing you have to pay attention to is how much time it takes to do.  If it consumes your time so that you don’t have time to make sales or service customers, it is kind of self-defeating.  But if you can do a Detailed Cash Plan in an hour or two, and not have to redo it for several weeks, it is time well spent. 

Starting out, no History

This is an ideal time to do some Detailed Cash Planning.  It helps you think through what you need to do to get the business off the ground.  It helps you decide whether to spend time trying to raise money, or spend the time bootstrapping, instead.  It helps you figure out how long you can survive without making any sales. 

In trouble

The stakes are higher, survival is at stake.  It is worth a lot of time and effort to be on top of your cash situation when the cash is in short supply.  The last thing you want to do is bounce a check when things are dicey.  Actually, the last thing you want to do is go out of business.  Detailed Cash Planning can help you through some tough times. 

In Transition 

When you are starting or growing a business, you spend a lot of time experimenting to see what works and what doesn’t.  Sometimes you zig, sometimes you zag.  It is nice to do some Detailed Cash Planning around these inflection points when the nature of your business changes.  The cash flow impact may not be captured in monthly budgets or traditional financial models.

How to guide – doing Detailed Cash Planning in Excel

Here is a step by step approach to preparing a detailed cash plan in Excel.  I’m sure there are several ways to do it.  I picked the first one that seemed to work. 

This is an expansion of the example mentioned in the article “Surviving a Cash Crisis – Fundamentals” (a must read if you are experiencing cash flow problems right now). 

There are Five steps to creating a detailed cash plan using this spreadsheet. (Download it for free at www.survivalware.com/download/Weekly_Cash_Flow_Forecasting.xls

Step 1 is to figure out how much cash on hand you have now.  Hopefully your book-keeping is caught up and this is a simple matter of going into QuickBooks (or other accounting software) and checking to see what is in your bank account. 

Step 2 is to figure out who you have to pay when, going out over the next few weeks or months.  In preparation, you may want to print out the check register for the last 90 days to get a feel for what you have been paying, and what time of the month.  If your payables are up to date, print out a detailed listing.  Otherwise, keep handy the stack of bills, sorted by date due. 

Enter the end date for week one in the yellow cell (E7) and the other dates are adjusted to be at one week intervals. 

  

Step 3 is to estimate receipts from current customers.  Enter a list of open Invoices, including the date and amount of each open invoice. 

The date of payment for each invoice will be calculated by adding the Collection Period in the yellow cell (C26) to the date of each invoice. 

  

Step 4 is to estimate cash inflows from sales that happen in the future.  Enter monthly or weekly sales estimates and make an assumption about collection period. 

  

Step 5 is to enter any special events – such as going to the limit on your credit cards, or cashing in a 401k.  

Then look at your forecasted ending cash balance at the bottom of the spreadsheet.  You don’t want to see any red numbers down there.

How to guide – using the SurvivalWare Cash Planner

 

 

Let’s continue with the same set of assumptions from the Excel spreadsheet, but this time using the SurvivalWare Cash Planner.     

Step 1 – enter the current cash balance.  And also define the planning horizon with the ending date of the first period, and the number of periods, and their units (days, weeks, months).  

 

Step 2 – enter payments.  We can copy/paste from Excel.  Also, if you use QuickBooks, you can export the current payables to a file that SurvivalWare can import. (See www.survivalware.com/download/Importing_AP_into_SurvivalWare.pdf)

  

Step 3 – enter open invoices. Again, we can copy/paste from Excel.  Also, if you use QuickBooks, you can export the open invoices to a file that SurvivalWare can import. (See www.survivalware.com/download/Importing_AR_into_SurvivalWare.pdf)

  

Step 4 – Enter monthly sales estimates.  You have the option of making assumptions about the percentage of orders that are prepaid vs. invoiced, and you can take commissions out of the future cash flow stream as well.  You can also set billing patterns if you want (e.g. End of month billing for services vs. evenly distributed throughout the month for product sales). 

 

Step 5: Look at the results. You see them graphically, though you are at a loss as to why it takes 4 charts to convey the message.  All you need is the bottom charts to see if there are any months where your cash balance dips below zero.  It turns out they are identical when you do a simple estimate, but will display different measures when you do a simulation.

 

Here’s where SurvivalWare Cash Planner starts to shine. 

Working on a payment plan

You can mark one or more payments, and then delay them by a certain amount of time, or split them into multiple pieces. 

  

SurvivalWare makes note of the delay in the Payments tab. 

  

Now the results tab shows there is no problem.  You just have to explain the situation to your landlord and employees. 

  

Dealing with multiple credit lines and/or credit cards

 What, you actually borrow against credit cards to finance your business?  Don’t you read the know-it-all financial planning columnists who tell you what a bad thing that is to do?  A very costly form of borrowing?!  Shame on you. 

If you’re going to construct a portfolio of high coupon debt to provide the capital wherewithal to seize opportunities in your business (or borrow from your credit cards to keep from going bust)  – the least you can do is keep track of the details and know where you stand and how it affects your cash flow and cash cushion. 

  

There is a grid in the Credit Lines tab to capture all the information you need to forecast interest, fees, and minimum payments, plus available borrowing capacity in future time periods. 

(see www.survivalware.com/download/CreditLines_in_SurvivalWare.pdf for a full explanation of the Credit Line feature). 

When you run a simulation, you can instruct SurvivalWare on whether it is OK top tap unused credit lines to keep from running out of cash.

  

Introducing uncertainty

 You don’t need SurvivalWare to introduce uncertainty into your life.  I’m sure there’s a lot of that already.  SurvivalWare helps you cope with uncertainty in your cash flow by tying many different assumptions together into a single simulation. 

The computer in effect asks “what-if?” 100 times for each tiny event, including the collection of a specific invoice – and tabulates the end result of all the tiny events happening at random, but within the ranges you set. 

In the settings tab, just pick “Run a SIMULATION.”

  

Collections of existing accounts receivable

You know damned well that not every customer pays in precisely 35 days.  In fact, some receivables may go bad, and you never collect. 

The collections tab allows you to set the “mean” collection period based on the age of the receivable. 

  

Future Sales

This is where you really need a crystal ball.  First, to forecast what sales will be next week, next month, or next year.  Second, to forecast when you’re actually going to collect the cash for those sales. 

SurvivalWare allows you to forecast up to 10 revenue streams, each with its own billing pattern and other cash flow characteristics. 

  

For each revenue stream, you specific a low value, most likely, and high value for the sales in each month of the planning horizon.  You can also specify that a certain percentage of the sales are made for cash (as opposed to invoiced), and you can take commissions out with a lag time from when the money is collected from the customer.  (A negative lag time means you pay commissions before collecting). 

  

Uncertain major events

 The source of the uncertainty could be the timing (a major deal is sure to close anywhere between the 1st of June and the end of August), or the amount (e.g. penalties and interest less negotiated abatements to the IRS for past transgressions), or both. 

I can never remember the format, so I click on the help icon (“?”) in the “Income / Extr Event” tab. 

 

 

 

Tying it all together 

That is what a simulation in SurvivalWare does for you.  Click on the “Results” tab and  the 4 quadrants tell the story of the simulation. 

Here it is without the big deal: 

  

Here it is with: 

 

The tabs along the right hand side of the screen let you access other graphs, or dive into the numbers. 

Upper left: Receipts vs. Requirements

This graph shows what happened during the simulation.  Each green line represents the cumulative amount of cash received at the end of each time period for a single “trial.”  The bottom red line represents the cumulative cash required to make all the payments you listed after exhausting your initial cash balance.  The other red line adds to that the minimum payments required on your portfolio of credit cards if you are using the credit line feature.  It is good to see green lines above the red lines – that means you have enough cash.

  

Upper right: Survival Score 

This graph shows the probability of being able to make the payments according to your payments schedule.

 

Lower left:  Cash – Conservative View 

This graph shows your cash balance for each time period with 90% confidence.  This means that during the simulation, 90% of the time your cash balance was actually higher than the value shown. 

 

 
 

 

Lower right: Cash – with Luck 

This graph shows what might happen with a little luck. It shows your cash balance for each time period with 50% confidence.  This means that during the simulation, 50% of the time your cash balance was actually higher than the value shown.

 

 
 

 

 

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 
 

 

 

 

 
 

 

 
 

 

 

 

 

Surviving a cash crisis – Fundamentals

 Surviving a cash crisis – Fundamentals

(This article originally appeared on the SurvivalWare website several years ago.  I thought it might be helpful in these turbulent times). 

This article is intended to give you a common sense, rational approach to assessing how bad things are, and to use the information to help craft a way to survive until things improve.

You can follow the basics using a spreadsheet package such as Excel. SurvivalWare’s Cash Planner module is another tool that can help you deal with a cash crisis, and is especially good at handling the uncertainty associated with when sales are made and when the money is actually collected. Predicting cash flow can make forecasting the weather look easy by comparison.

The detailed example shown below is based on a true set of circumstances. Many of the names have been changed to protect the privacy of the participants, and the dates have been changed to 2002 to further disguise the numbers. The entrepreneur actually survived, and the company is still in business.

Setting the stage

It is hard to be rational when it feels like the world is closing in, like you are traveling 70 MPH about to hit a brick wall. With no airbag. Or seatbelts. And leaky brakes. The road covered with oil. Your life starting to flash before your eyes in slow motion.

I can feel your pain!

You’re in trouble. You’re not sure how bad, but it feels awful. You don’t know how you’re going to come up with the rent due in 3 days, not to mention payroll the day after. You’ve got some receivables, and there are sales trickling in.

Don’t feel guilty about running low on funds. If you wait until you save enough money to take the plunge and start your own business, you’ll never get your business started. Even if you raise big bucks up front, it is never enough. There are unknowns and things beyond your control. Running lean for a few years is great discipline. If you had a big chunk of money when you’re just starting off, you’d find some way to convert it to a small chunk of money and wonder where it went. So there is a silver lining to this cloud.

Some fundamentals

But first some fundamentals. Let’s take a dispassionate look at your situation. Can you survive the next three months?

A real broad brush look is to take your current cash balance, add in unused “credit lines” (i.e. Visa and MasterCard) and then look at collections and expenses the next 3 months. Here’s what it might look like if you’ve had a few bad months:

  Jan Feb Mar
Cash $ 5,000    
Credit Limits 100,000    
Less: Borrowings 80,000    
Unused credit 20,000    
       
       
Beginning Cash & Equiv 25,000 17,500 10,000
Expected collections 15,000 15,000 15,000
Payments Due 22,500 22,500 22,500
Ending Cash & Equiv $17,500 $10,000 $ 2,500

Not pretty, but you muddle through the next three months.
Here’s what it might look like if collections are just $5,000 less each month:

  Jan Feb Mar
Cash $ 5000    
Credit Limits 100,000    
Less: Borrowings 80,000    
Unused credit 20,000    
       
Beginning Cash & Equiv 25,000 12,500 0
Expected collections 10,000 10,000 10,000
Payments Due 22,500 22,500 22,500
Ending Cash & Equiv $ 12,500 0 (12,500)

That (12,500) at the end of March means you’ve gone bust. It is when you see a problem here that you need to do some more detailed analysis and work. Otherwise, you can quit reading this article and go have a beer.

Don’t panic. Things could be worse. If you believe in the basic soundness of your business idea there is a way to muddle through. I had to chuckle recently when a friend told me that his firm was in dire straights – down to 30 days of cash. Heck, I know people who have gone 10 years at a stretch without getting up to 30 days of cash.

A more detailed look

First things first. If you’re already behind as opposed to just having a sense of impending doom, you need to work quickly. You need to devote an intense couple of hours to analyzing and worrying about the problem. This should give you two to four weeks before you have to look at things again. This is the key: do some intense work on the problem, decide on a plan, and then tend to your business for a couple of weeks at a stretch without worrying about it. (I know – easier said than done). 

 

Step 1: List of Payments Due

First, make a list of all the bills that are due and overdue. You can do this in Excel, Word, notepad, or on paper. It’s best if you do it in Excel, because then you can sort by date, and sum by week. The important thing is to make the list.  A good place to start is to look at all the checks you’ve written the last couple of  months.

Extend the list out for the next 3 months. Include target due dates. Group cash needs into categories, starting with Payroll. Payroll probably accounts for 50% or more of your total expenses.

Other categories would be:

  • Regular monthly expenses (rent, telephone, computer leases, etc.)
  • Special expenditures required to produce revenue
  • Payments on overdue accounts
  • Other

A wise banker (an oxymoron?) once told me that you’ve got to pay your people – they’ve got to eat, and they have mortgages to pay. You have to give payroll priority.

Part of the objective here is to figure out which items you can pay late. Credit card and lease payments you want to make on time for the most part, because they charge stiff late fees, and they are more likely to affect your credit report sooner rather than later.

But yes, you can get away with skipping a credit card payment. And you can be sure your leasing company doesn’t want to take back that obsolete equipment, so they will work with you.

Rent you can sometimes get away with paying late, but you have to be careful not to trigger eviction. I had one landlord I had trained to expect payment at the end of the month instead of at the beginning. I made a point to pay it sooner if I had the money, and to never go over 30 days (except maybe once or twice). I also returned all their calls promptly when they called for payment. Periodically I had to break in a new collections clerk, but they gradually learned that I was slow, not a deadbeat.

A generation ago the conventional wisdom was that you had to pay your phone bill before anything else. But with long distance being so competitive nowadays, you have a bit more wiggle room. Most of them have terrible billing systems anyway. So you should be able to slide a little bit if you need to. And they do you give notice before they cut you off. Same with the local phone service.

You may have some subcontractors and others who can expect to share in your success when you do well. These can also be reasonably expected to share some of the risk and wait for their money when things are not going so well.

Here’s what the initial list might look like in Excel:

Detailed Cash Projection  
     
Payments  
     
Date Due Description Amount
     
Payroll and withholding taxes  
1/10/2002 Payroll 2200
1/15/2002 Payroll taxes for December 2200
1/22/2002 Payroll 3000
1/20/2002 State tax withholding for December 600
     
2/10/2002 Payroll 2200
2/15/2002 Payroll taxes for January 2300
2/22/2002 Payroll 3000
2/20/2002 State tax withholding for January 450
     
3/10/2002 Payroll 2200
3/15/2002 Payroll taxes for February 2300
3/22/2002 Payroll 3000
3/20/2002 State tax withholding for February 450
     
4/10/2002 Payroll 2200
4/15/2002 Payroll taxes for March 2300
4/22/2002 Payroll 3000
4/20/2002 State tax withholding for March 450
     
Leftover from previous month  
1/5/2002 Verizon 310.65
1/5/2002 Cellular 84.74
1/5/2002 Dell Financial 171.78
1/5/2002 AT&T Financial 354
1/6/2002 Lucent 29.57
1/5/2002 Sprint 75.23
1/5/2002 Qwest 130.47
     
Regular Monthly Expenses  
1/22/2002 Rivulet IT Group 5000
1/8/2002 Crestar bank card – Travel 1000
1/28/2002 Outrageous phone system lease 354.76
1/11/2002 Staples 100
1/14/2002 FU Bank Visa 350
1/15/2002 Office rent 1092
1/15/2002 Dell Financial Services 169.48
1/7/2002 Dell Financial Services 225
1/18/2002 AT&T Capital – Computer lease 224.19
1/11/2002 Acme Long distance 178.93
1/18/2002 Verizon – local phone service 218.6
1/22/2002 US Bancorp Visa 250
1/22/2002 Blue Cross 790
1/28/2002 Sanwa Computer Lease 267.23
1/28/2002 Contingency 1500
     
2/8/2002 Rivulet IT Group 5000
2/8/2002 Crestar bank card – Travel 1000
2/28/2002 Outrageous phone system lease 354.76
2/11/2002 Staples 100
2/14/2002 FU Bank Visa 350
2/15/2002 Girlland and Associates 1000
2/15/2002 Office rent 1092
2/13/2002 Dell Financial Services 169.48
2/7/2002 Dell Financial Services 225
2/18/2002 Acme Long distance 200
2/18/2002 Verizon – local phone service 300
2/22/2002 US Bancorp Visa 250
2/22/2002 Blue Cross 720
2/28/2002 Sanwa Computer Lease 267.23
2/28/2002 Contingency 1500
     
3/8/2002 Rivulet IT Group 5000
3/8/2002 Crestar bank card – Travel 1000
3/28/2002 Outrageous phone system lease 354.76
3/13/2002 Staples 100
3/14/2002 FU Bank Visa 350
3/15/2002 Office rent 1092
3/15/2002 Dell Financial Services 169.48
3/7/2002 Dell Financial Services 225
3/18/2002 Acme Long distance 200
3/18/2002 Verizon – local phone service 300
3/21/2002 L&A 75
3/22/2002 US Bancorp Visa 250
3/22/2002 Blue Cross 720
3/28/2002 Sanwa Computer Lease 267.23
3/28/2002 Contingency 1500
     
Special Expenditures to produce revenue  
1/11/2002 Printing and mailing 542.98
     
Long term catch up  
2/28/2002 Nelson Reed 500
3/30/2002 Nelson Reed 500
4/30/2002 Nelson Reed 285
     
2/18/2002 JPJ 100
3/18/2002 JPJ 100
4/18/2002 JPJ 100
     
1/25/2002 IRS 1000
2/25/2002 IRS 1000
3/25/2002 IRS 1000
4/25/2002 IRS 6000
     
2/28/2002 Howie 500
3/30/2002 Howie 500
4/30/2002 Howie 500

Note the use of “contingency” as a payment due. Trust me – when you make a list of payments due, that will be the minimum. There will always be things that come up that are important. And if nothing comes up – it becomes cushion.

Also, note that the real work in coming up with the list of payments due is in doing the first month. After that you can copy and paste and change the dates.
So you make your list of payments due, and total them by week. You can do this in Excel by sorting the worksheet based on column A.

First copy the entire three columns to a new worksheet in the same workbook (i.e. a new tab). Sort this data in the second tab by marking all three columns, and then pick Data / Sort. Click “Header Row”, and then click OK.

You’ll get something like this:

Detailed Cash Projection  
1/5/2002 Verizon 310.65
1/5/2002 Cellular 84.74
1/5/2002 Dell Financial 171.78
1/5/2002 AT&T Financial 354
1/5/2002 Sprint 75.23
1/5/2002 Qwest 130.47
1/6/2002 Lucent 29.57
1/7/2002 Dell Financial Services 225
1/8/2002 Crestar bank card – Travel 1000
1/10/2002 Payroll 2200
1/11/2002 Staples 100
1/11/2002 Acme Long distance 178.93
1/11/2002 Printing and mailing 542.98
1/14/2002 FU Bank Visa 350
1/15/2002 Payroll taxes for December 2200
1/15/2002 Office rent 1092
1/15/2002 Dell Financial Services 169.48
1/18/2002 AT&T Capital – Computer lease 224.19
1/18/2002 Verizon – local phone service 218.6
1/20/2002 State tax withholding for December 600
1/22/2002 Payroll 3000
1/22/2002 Rivulet IT Group 5000
1/22/2002 US Bancorp Visa 250
1/22/2002 Blue Cross 790
1/25/2002 IRS 1000
1/28/2002 Outrageous phone system lease 354.76
1/28/2002 Sanwa Computer Lease 267.23
1/28/2002 Contingency 1500
2/7/2002 Dell Financial Services 225
2/8/2002 Rivulet IT Group 5000
  Etc.  

Then create formulas to sum up the payments by week. This is a pain to do by hand – but a necessary step. There might be some elegant way to do it in Excel, but I don’t know what it is. This is part of what SurvivalWare will do for you automatically. In Excel, you want to end up with something like this:

Beginning Cash: $1,000.00  
     
    Cumulative
Week ending Amount needed amount needed
1/11/2002 $5,403.35 $4,403.35
1/18/2002 $4,254.27 $8,657.62
1/25/2002 $10,640.00 $19,297.62
2/1/2002 $2,121.99 $21,419.61
2/8/2002 $6,225.00 $27,644.61
2/15/2002 $7,211.48 $34,856.09
2/22/2002 $5,020.00 $39,876.09
3/1/2002 $4,121.99 $43,998.08
3/8/2002 $6,225.00 $50,223.08
3/15/2002 $6,211.48 $56,434.56
3/22/2002 $5,095.00 $61,529.56
3/29/2002 $3,121.99 $64,651.55
4/5/2002 $1,000.00 $65,651.55

In this case, we need $4,403 by the end of the first week, taking into account the $1,000 we already have in the bank. By the end of 13 weeks, we’ll need a total of $65,652 in addition to the money already in the bank. A quick sanity check is to divide this number by three – and ask yourself if that is the approximate amount of your monthly expenses. Of course, there may be some “catch-up” payments embedded in there – which would make the total higher than your normal expenses.

So now what?

What you have to do is come up with a combination of delayed payments, accelerated collections, and / or new borrowings/investment to reduce the peak shortfall to 0.

Delayed payments

Anything you can slide a week or two, do so. If you are drawing a paycheck, you will be at the top of the list of people being paid late. After making date changes and/or splitting payments in the Excel file, you have to re-sort the payments, and re-compute the sum for each week.

Accelerated collections

There is an art to asking customers for money while seeming like you don’t really need it. “Hey look Joe, my bookkeeper asked me to give you a call – apparently we have no record of receiving that last payment. Can you double check to make sure it didn’t fall through the cracks?”

Or “Hey Joe – we’ve got a big tax payment coming due – any way of expediting payment on the latest invoice?”

Depending on how friendly you are with your customers, you can even impose on them once in a while. “Hey Rich, any way you could Federal Express the payment if I fax you the January invoice?”  But you only want to do this when you really, really need to. The purpose of the detailed cash planning is to know when you really, really need to.

Invoicing fundamentals

Invoicing is like voting in a Chicago election – do it early and often.

It is so easy to procrastinate on the administrative side of the house – but this is one area where you have to avoid procrastinating. It doesn’t matter when the invoice says payment is due – the invoice is not going to get paid before it is sent out. Think of it this way: if you consistently send out invoices a week late, you are delaying receipts by a week. If you average $7,000 a week in receipts, the net effect is that you have $7,000 less to work with. If you take 10 days to send out the invoices, it’s the same as if you need another $10,000 in working capital to run your business.

Offering discounts can speed collections, but make sure you do the math and understand how much it is costing you. Some large companies have policies in place that require the payables department to speed payments to earn discounts – e.g. 2% for paying within 10 days. Many years ago we offered a 5% discount for payment in 10 days – which did speed collections, but also gave out the signal that we were desperate for cash (we were!).

Also, keep in mind that some companies will take the discount regardless of whether they meet your payment terms – so make sure you monitor the impact if you do offer early payment discounts.

If you are billing customers for time – consider going to twice a month billing. I know of a company that provides programming services and bills it customers promptly the 1st and 15th of each month. My hat is off to the entrepreneur who runs it.

New borrowings / investment

Remember what they say about banks: they will lend you money only if you can prove beyond a shadow of doubt that you don’t need it. My experience is consistent with this saying.

Outside investors will sense your plight and demand onerous terms – usually involving control of the company and perhaps your firstborn. Some will add a clause taking your firstborn from your current marriage and all future marriages. Venture capitalists are known as vulture capitalists for a reason.

The best time to arrange to borrow or for someone to invest is when there is not the tremendous time pressure associated with a cash crisis. I know – easier said than done.

This is a time to turn to friends and family, and/or to get creative. Key customers might be able to help as well – maybe not with a formal investment – but perhaps advancing money to undertake a new project, or pre-paying for products in anticipation of future demand.