Cash Flow

Cash Flow – The Lifeblood of Your Business

Let’s deal with the question of why cash flow is so important. In essence, cash flow is the lifeblood of a company and is fundamental to its very existence. It indicates whether or not a company can pay its bills. If cash flow were a steady stream of receipts and disbursements, fore­casting would be unnecessary. Under such conditions, if all bills were paid last month, they again would be paid this month, and so on.

How­ever, in reality, cash flow fluctuates from day to day, month to month, sea­son to season. A few factors that contribute to the ups and downs of cash flow are: some months have five weekly payrolls, while other months have only four; raw materials purchased in bulk often have significant discounts. A company may permit its inventory to decline until the appropriate eco­nomic order quantity may be purchased; sales are often seasonal. Consequently, payments will fluctuate; Debt payments may be on a semiannual basis, an annual basis, etc; new property, plant, equipment, and leasehold improvements are not purchased evenly throughout the year; commissions or bonuses may be paid annually but accrued for through­out the year; and, factories are often shut down for repairs or vacations.

The timing of some of the above factors may be optional and within man­agement’s control. For example, payments of inventory or the purchase of leasehold improvements a week late rarely has a devastating effect on a company. On the other hand, the nonpayment of a bank loan or required debenture sinking fund payment may cause a default and subsequent involuntary bankruptcy. Therefore, the ability to determine, thus forecast, these peak cash flow demands becomes vital to corporate management.

Accurate cash forecasting can also prevent the loss of earnings to a com­pany. It can be quite embarrassing and costly for a new cash manager to secure a long term high-yielding money market instrument only to discover a week later that cash is needed to purchase inventory and the security must be sold at a loss.

There are many different types of cash flow forecasts, each serving a separate and distinct purpose. The following are just a few types of forecasts and their related uses.


Usually covering a period of less than one year, this type of forecast is designed to assist in the day-to-day operations of the business. It principally highlights the peaks and valleys resulting from seasonal sales, inventory purchases, etc.


Usually covering one to three years, this type of fore­cast is principally used to evaluate the company’s ability or inability to meet a specific cash requirement, for example, a debenture payment or the estimated payback period on an investment.


Usually covering in excess of three years, this type of forecast is used almost exclusively for long-range planning for acquisitions, expan­sions, etc.  Since forecasts are strictly management tools, they must be sensitive to management’s needs. Therefore, each of the above types of forecasts, especially the intermediate- and long-term forecasts, is often further sub­divided into the following classifications.

Worst Case

This forecast is prepared using the most conservative assumptions; for example, the highest expected interest rates on debt, a low sales growth, or, even worse, no sales growth. It is often used by man­agement to determine the lowest return a company can accept on an investment or the most a company can borrow and ensure repayment.

Best Case

This forecast is prepared using the most aggressive assump­tions, for example, the lowest interest rates on debt, the maximum growth rate. It is used to determine the amount of growth that can be obtained before new equipment must be purchased or new financing must be obtained. Remember, business cash-flow planning is essential to your company’s sustainability. So, while profits are important, you must continually have your hand on the pulse of your business’s cash inflows and outflows.

Contact the Turnaround Group if your business need help with cash flow.

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