Some agencies have plenty of cash in hand and feel no stress at month-end meeting their cash obligations with income and cash-in-hand. Others are stressed every month hoping that the combination of direct bill statements and collected agency bill invoices meets their payroll and other cash obligations.
Regardless of whether you are a cash-rich or a cash-poor agency, every agency owner wishes (s)he had a way to project monthly cash flow and their cash obligations in order to know if and when cash infusion is needed. You may want to consider whether cash must be left in non-interest bearing bank accounts or can be put to more productive use.
We don’t get many agents asking for Cashflow Projections simply because it takes a bold and brave owner to actually predict if and when a cashflow shortage will occur even though we already know which months is traditionally strong and which are weak. Most of us would rather hide our heads in the sand and hope for better results than we expect or have had historically. Then we hound our bookkeepers or keep an eye on the bank account in fear of the worst.
Cashflow CAN be projected. It’s not voodoo or guesswork. It’s a process and if you follow the process every month not only will you be more certain of your cash needs, but you will also build a track record of data that will make the task easier every year.
Our cashflow projections are built on historical revenue receipt and historical monthly cash disbursements with agency annual projections of revenue receipts and budgeted expenses acting as the core of future projections. If the revenues are generated as projected, the cashflow projections based on historical performance will be quite close. If either the revenues or the expenses do not achieve the expected levels in the projection period (usually one year), the cashflow projections will be off and the Deviation Report that stems from the on-going analysis will reflect that.
Begin the process by listing on a spreadsheet your income month by month for at least the last three years; the longer the view the more accurate the trending analysis. Calculate the percentage of income generated in each month compared to the entire year as a percentage of the year. When you have completed this for the years reviewed, you can form the basis of calculating the average percentage of revenue generated in each month. Those trended percentages can be applied to your planned annual revenue for the next year to identify your average expected income per month based on the three or more years studied. You have built the rudiments of an income projection.
If you perform this analysis for at least three years or more, you also have a basis for changing the % Income by Month into a Trended Percentage that reflects the average changed to follow the trends in your agency. Make sure the Trended Percentages total 100% (your averages will automatically total 100%). Trending is more art than science. The more years you have available in front of you, the better you can visualize a trend. We include space to physically change the averages to trended expectations when a trend upwards or downwards becomes apparent for a month. The results are measured against the historical average AND the trended average.
I’ve included below displays of our Cashflow Analysis software that we use for our clients for whom we do annual Cashflow Analysis. Our first sample display is the Income Projection for a client agency (with their permission, of course) for whom we do Strategic Planning and Cashflow Analysis.