Cash Flow Forecast Archives - Page 2 of 2 - TurnAround Social Sector Coaching

Somebody who reads this article needs cash today.

Without cash, you don’t have time to fund raise, to borrow, or to think. You can’t increase your services because you have no cash to advertise. You may even be profitable – but slow payers are strangling your cash.

You have one more source of cash – collecting cash that people owe to you.

 

Are You in the Banking Business by Accident?

Most of us allow government and clients to get our services and pay later. The bank calls that a no interest loan. Here’s an example.  Let’s say that your budget is $1 million and you offer job training where most of the expense is paid by the government. Clients pay for daycare for their kids while they take the training.

  • Assume that 90% of your cash is received after you provide and bill for your job training services and daycare. Assume that it takes another 2 months to actually get the money. Your financial report every month shows about $225,000 as the accounts receivable. Use this formula.  90% of your budget of $1,000,000 is paid late and you carry $225,000 (3 months) constantly in bills that people have not paid. You need that cash now for payroll and rent!
  • The formula is (90%*$1,000,000)/ (225,000)  = 4.
  • You are accidentally in the banking business! 90% of your customers slipped a no interest loan into the services you provided. That number 4 should be much higher or negative.
  • Divide the number of days in a year (365) by 4 and the answer shows that you wait 91 days on average to get paid. This can put you out of business! If you can reduce to 60 days to get paid, you have just added $75,000 to your bank balance!

 

How can you get your $75,000?

  • Discount for immediate payment. If you are paying 7% on a line of credit while you wait for your money, it makes more sense to offer a 5% discount for full payment. Cash will start coming in this week. We needed cash and offered a 5% discount for the tuition paid in full. To my amazement, one person came in and paid $19,000 immediately. We would have paid 7% on our line of credit.
  • Require a deposit. It raises your number 4 and reduces the amount of missing money. A deposit means you are collecting money before service is provided. Landlords always charge rent for the month ahead, the security deposit and the last month’s rent. They reverse the cash and are borrowing 90 days of cash from their tenants at no interest!
  • Require payment today for services today. You are no longer in the banking business. A simple model.
  • Develop a relationship with all the government agency secretaries. Learn the names of their kids and what they hope to do on vacation. They have power. One secretary took our claim and quietly moved it to the top of a big pile. Relationships make a difference!

 

Can you stop being the government’s bank?

Not 100%. But you will find with daily calls and emails, money will arrive much sooner than patiently waiting. And all of these ideas are simple enough to start today. Why are you waiting? Get your cash!

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A maximum of 10 companies per year develop a relationship for Business Coaching to turn around their company or scale up past a growth barrier.

Most Non Profits have little idea about the working capital to keep in the bank at all times. Nonprofit articles often recommend cash equal to 6 months of expenses. Those writers have obviously not actually worked in a smaller nonprofit. Aside from a legacy, there is little chance of putting aside half of the year’s program budget for a rainy day fund.

Many nonprofits take one of two approaches. One approach is to receive a windfall legacy or grant and keep the entire amount in a savings account to be safe. This sadly reduces the investment in mission. Imagine operating a food bank that can open a new location and get reimbursed for food. It will cost $1,000.000 to renovate the space. The Board decides not to proceed because it has $3 million available and fears drawing down its cash.

The other common approach is to put your head down, keep operating and hope that the day never comes when the unavoidable demand for cash clashes with the available bank balance.

Fortunately, there are formulas that help.

Greg Crabtree* advocates for 2 months of operations plus 10% profit of cash in bank. For example, a $12,000,000 revenue company might have $2,000,000 plus $1,200,000 ($3,200,000) in ready cash and securities.

On a daily basis that same company may only need $10,955 in constantly available cash and the rest in a money market (or line of credit).

Get out the calculator! The formula is  (2 * monthly amount needed to pay bills) / (Interest rate on line of credit/ 12).  Got that?  Now take the square root of that number.

Example: Your budget is $12 million** and your business is so regular that you need exactly 1/12 of that every month to pay bills. Line of credit is 5%

(2 * 1,000,000) / (.05 / 12) = 480,000,000.  The square root is $21,909.  The maximum to keep in the bank account is that amount and the average daily balance should only be $10,955. Save on line of credit costs or get more interest from the money market by holding only what the formula requires.

You can feed the hungry while making sure that your agency doesn’t end up needing bread.

*CRABTREE, GREG. SIMPLE NUMBERS, STRAIGHT TALK, BIG PROFITS!: 4 Keys to Unlock Your Business Potential. LIGHTNING SOURCE, 2014.

**My companies always have regular numbers to make clear examples. Don’t be surprised if you need to make some adjustments when you apply the formulas 🙂

If you want One Minute TurnArounds by email, please sign up!

GDPR – Your email is collected by an automated system so that the One Minute Manager posts can be sent. You will be invited twice a year to a two hour Scaling Up workshop for CEOs and EDs. Annually, you will be offered an Ebook and asked whether the resources of TurnAround Business Coaching are helpful.

A maximum of 10 companies per year develop a relationship for Business Coaching to turn around their company or scale up past a growth barrier.