Cash Flow Forecasts Create ‘Vision’

by WOHe

Once an annual budget is established, there are a number of
tools that can be developed and utilized by kitchen and bath
dealers to manage operations for the greatest growth and

One such management tool is the Cash Flow Forecast, which has
two important applications. The first is for startup or expanding
firms to prove they can afford to pay back the interest and
principal on a business loan. The second is for use during a
business downturn to determine when and how to meet corporate

The Cash Flow Forecast is also a key document for securing
business loans. Fact is, under-capitalization prevents most small
businesses from realizing their full income and profit potential.
However, proper planning and an effective presentation to lending
institutions can overcome this obstacle to financial success.
Witness the 12-Month Cash Flow Forecast in Figure 1, developed for
a recent startup kitchen and bath operation looking to borrow
$125,000. This is a pivotal document banks use in determining
whether to make a loan.

What follows are some pointers in creating a Cash Flow

  • Project realistic sales order and billed income figures. It’s
    important to be conservative when doing this. If you overstate
    these numbers, you may be successful in securing a loan, but
    unsuccessful in your new or expanded operation.
  • Adopt the industry’s recommended payment terms of 50-40-10%.
    Most banks will be impressed that your firm can command these “near
    cash” terms to generate relatively large monthly total inflows.
    It’s the major reason why a startup business may have a first-year
    loss but a positive cash flow. The firm cited in Figure 1 projected
    a $24,000 first year loss (5%) on $480,000 of income (based upon
    the accrual method of accounting). Yet the forecast shows a
    positive cash spin-off at the end of the first year (March, 2002
    through February, 2003) of $53,594 ($83,929-$30,335).
  • Cash Outflows can be projected accurately from your annual
    budget. (See the March 2002 issue of Kitchen & Bath Design
    News, Pages 37-39, to learn the correct steps in establishing a
    budget and price formula gross profit margin for your operation.)
    Because the right GPM for the illustrated startup’s overhead
    structure was 36%, 64% of the $40,000 July income became the
    $25,600 projected cost of goods sold for that month.
  • Interest on your loan should be included in Other Expenses. In
    the example I’ve provided, there was income from Cash Discounts and
    Buying Group Rebates to offset the interest expense.
  • Show the Principal Repayment on a separate line. You want to
    furnish clear, visible proof to bankers that your business can
    easily cover the monthly principal repayments.
  • List Assumptions behind the Forecast’s projections. Lending
    officers and underwriters want to understand how you arrived at
    your figures.

Despite negative monthly net cash flows in seven of the first 13
months of operation, the forecast for the startup firm I’ve used as
an example reveals comfortable cash flow positions at the end of
each month. The combination of earmarking $37,500 of the $125,000
loan for fixed overhead expenses and the 50-40-10% payment terms
accomplished this important objective. As a result, the Cash Flow
Forecast was instrumental in winning bank approval for the $125,000
loan request.

Professional Crisis Managers consider a Three-Month Cash Flow
Forecast updated monthly even weekly or daily in extreme situations
to be the fundamental tool for survival.
In the kitchen/bath industry, dealer firms that focus heavily on
builder business, and other market segments where the 50-40-10%
payment terms are relaxed, would do well to use this Cash Flow
Forecast on an ongoing basis. It’s the only way to get a clear
picture of your finances so you know (a) when and how much cash to
infuse in the operation from a credit line or owner’s resources,
and (b) when key creditors can be told to realistically expect a
check for a past due invoice.

Referring to Figure 2, here are a few observations:

  • Cash Inflows are an outcome of weekly management meetings.
    Based upon retainers and salesperson reports, the firm’s sales
    manager furnishes a list of job names and sales amounts expected to
    close each month. The project manager furnishes two lists: one for
    job starts and one for substantial completions. From these three
    lists, the business manager can calculate how much is expected in
    each of the next three months from (a) Deposits, (b)
    Due-On-Delivery payments, and (c) Substantial Comple-tion
  • Cash Outflows are an outcome of your Annual Budget. The
    percentages (of Billed Income) for Sales, Administrative, and Other
    Expenses are a direct result of the budgeting process. Of course,
    if a known, unbudgeted expense must be made paid during one of
    these three months, a separate line item must be added to create
    accurate Cash Outflows.
  • The Forecast signals when cash will be tight. In this
    Three-Month Cash Flow Forecast, the dealer can start planning for
    supplemental cash needs 30-45 days in advance of the tight
    conditions projected for the month of April.
    Once the 12-Month and Three-Month Cash Flow Forecasts are put on
    Excel Spreadsheets, they’re easy to use and update. The information
    and vision they yield greatly enhances a kitchen/bath dealer’s
    ability to effectively manage his operations.

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