Keeping your cashflow positive

A cash flow forecast is one of the best tools you can have for understanding how healthy your business is in the near term. Predicting cash flow isn't about budgeting. It’s about understanding how much money you're taking in minus how much money is going out.   

The challenge is you can have money that’s owed to you, but if you don’t have money on hand to pay the bills, then your business can find itself in financial trouble.

The following cash flow exercise will guide you through the process of making a cash flow prediction for your business over the next six months. 

Step 1: gather documentation   

Gather two to four months of documents that show your income and expenses. Here are some examples: 

1. Bank statements 
2. Credit card statements 
3. Venmo transactions 
4. Utility bills 
5. Any other records of ways that you receive or spend money  

Try to use actual amounts for greater accuracy. If you don’t have actual amounts for everything, use an average. For example, you might need to use your average electric bill because you don't know exactly how much electricity you’ll use over the next few months.   

Step 2: pick a time frame and scenarios  

Choose a time frame that’s long enough to allow you to make decisions past one or two months, but short enough in case challenges or changes happen down the road. Six months is a good time frame but adjust as needed and choose what works for you. Never use more than a year.   

Through scenario planning you can plan for changes that may happen over time so you can plan for their potential impacts. You can use any number of scenarios, but it's good to develop three:  

1. Best case: where revenue and expenses shift to ease the stress on your business.  
2. Base case: usually the status quo, if the future plays out as you expect it to happen. 
3. Worst case: where revenue and expenses will trend in ways that could happen and would result in a more difficult position for your business.   

Identify the most significant factors and how they may trend in each scenario. Consider factors that are on the revenue and expense sides. Try to keep to just the most important factors - the three to five most likely to change in the future which could have the most significant impact on your business. For example, a potential increase in your healthcare costs by 50% would be a likely factor for your worst-case scenario, whereas a 1% increase in office supplies wouldn't be included.   

Include a list of the factors and articulate the cost impact in actual dollars (such as what happens if you get that $10,000 grant) or a percentage (such as a 10% increase to the cost of supplies).  

Use the table below to capture your assumptions for each scenario. Do one set of tables for each scenario so you can see the impacts.   

Table 1: scenarios

Step 3: list income

Categorize the money that comes in each month. Always include an “Other” category. Some examples are:

• Subsidy
• Fees
• Grants
• Other

Step 4: List expenses

Categorize money that goes out each month. Again, be sure to list an “Other” category. Some examples are:

• Personnel
• Taxes
• Rent
• Utilities
• Vehicle
• Phone
• Food/snacks
• PPE (Personal Protective Equipment
• Cleaning
• Loan payments
• Bank fees
• Other

Table 2: revenue

Table 3: expenses

Table 4: monthly and total cash flow

Step 5: review trends

Your total cash flow over the next six months will be the total amounts of revenue in table 2 minus the total amounts of expenses in table 3. You can also see the cash flow for each month by subtracting your total expenses from your total revenue for each month. Looking at cash flow month by month can be helpful because some months your revenue might be less than expenses, but other months it might be more. This tells you when you need to save money from one month to another.

Now that you have your cash flow projection, ask yourself a series of questions for each scenario to understand any trends that appear.

1. Are you profitable?
2. Are there months that are “feast or famine?”
3. Which month(s) has the highest profit?
4. Which month(s) have the lowest profit?
5. Which categories are your highest expenses?
6. Which categories are your lowest expenses?
7. Which categories are your highest revenue?
8. Which categories are your lowest revenue?

If you’ve completed your analysis and find you need to cut some expenses to increase revenue, here are some suggestions on how to do it:

Increase enrollment

This can be the most cost-effective way to build revenue. Ask your current families if they know of other families in need of care who they could refer to you. Reach out to other providers to find out if there are families who need care.

Consider weekly vs. monthly billing

If you currently charge $1,000 per month, most people assume that works out to $250/week, but months have five weeks, which translates to an additional $1,000 per year, per student. This method is an effective way to increase cash on hand if you have families who consistently pay on time. 

Speed your billing and collections

Bill as soon as possible, and don’t let money owed to you wait. It may be a difficult conversation with families, but the income is critical to keeping your business and the service they rely upon open. Consider child care management systems which can help speed billing while also cutting other costs or using payment applications for fast payment.

Find the best prices for toys, materials, and equipment

Buying used toys can save you significant amounts of money, and you can use sites that give you access to high-quality, pre-loved items. Check out your local Facebook selling groups, Goodwill, and the Salvation Army. 

Look for reoccurring subscriptions to cut

Review the different services and online memberships that you have. Often, they accumulate over time — we don’t realize how many we actually have or the impact they have on monthly cash flow. Determine which subscriptions you need and which you can discontinue.

Defer or reduce payments for rent, utilities, and mortgage

Many landlords, banks, and utility companies allow you to hold off making payments or make partial payments. The money is still owed but can provide vital cash to keep you going. Consider renegotiating your lease or moving to a new space (even hiring a broker to do so).

Automation

Look for ways to stretch your time and your staff’s time through apps and other programs. A child care management system helps with billing, attendance, and other functions. There are systems that can help with payroll and bookkeeping. 

Reduce staff

It's never an easy decision, but if needed, you can reduce staff quickly to conserve cash. Ensure reductions won't impact state and federal requirements nor overall quality and safety.

Disclaimer

The information contained here is for educational purposes only and is not intended to constitute legal, tax, or financial advice.