“Cash is King” in a small business.  A cash shortage is one of the hallmarks of a business slipping into trouble – a distressed business. The owner’s first priority is to pay the vendors whose services keep cash coming in. Bank loans don’t do this, so the owner asks the bank to wait for its payments. In response, the bank wants to know the company’s prospects for paying in the future. It asks the owner to forecast revenue and costs, and predict cash flow using a 13 Week Cash Flow Statement.

This is a spreadsheet starting with cash-on-hand. It then adds cash expected to be received from outstanding invoices, from work in progress, and from new business in the next 13 weeks, i.e. the next quarter of the year. It subtracts the cash used to pay for the variable costs for completing such work, and the expected overhead or fixed expenses to be paid during this period. The net is called “cash flow.”

The spreadsheet columns are the 13 weeks, and the cash flow at the bottom of each week becomes the cash on hand at the start of the next week. Thus the net at the bottom of each week is cumulative, showing all the expected cash-on-hand at the end of that week.

Each week’s column is like the page in a checkbook register, with cash at the top, money coming in, money going out, and the cash on hand at the end of the week.

Small business owners usually understand their expenses very well, and they know what is owed them from completed work and work in progress.

Their problem is forecasting new work and new revenue. Their bookkeeper is not a forecaster, and their accountant looks backward, not forward, so the cash forecast becomes the owner’s task. Unfortunately, the owner of a small business spends most of his or her time working in the business, not on the business. They normally rely on others to track the numbers.

When the owner has to do the forecast, they feel overwhelmed by the variety of possible work that might come in, and the uncertainty of what kind of work will come in during any given week. They know the bank is being reasonable to ask about their prospects, but feel frustration and resentment when asked to predict the unknown!

How does a small business owner predict revenue, costs, and cash flow on a weekly basis? Is there a secret formula? Probably not, but there are some techniques that can help you make a reasonable forecast for the coming weeks, whether or not your business is distressed and facing a cash shortage.

We’ll discuss this topic further over the next 3 weeks of posts.  In the meantime, check out SCORE's 13 Week Cash Flow Statement template and read more about how the 13-Week Cash Flow Model creates clear communication channels.