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Complete Guide to Create a COVID-19 Small Business Cash Flow Forecast

Cash Flow Forecast

The implications of COVID-19 are widespread and far-reaching. Even after states reopen and business resumes, the lasting effects of this crisis are already brewing. The pandemic is causing supply chain disruptions that are felt throughout every industry. 

If you want your business to survive the lasting effects of COVID-19, it is important to create a cash flow forecast for the next three months. Learn how to plan for the best, average, and worst-case financial scenarios. And, prepare your business for a wide range of financial what-if” scenarios, by understanding all the possibilities that the next three months may hold for small businesses. circumstances

How to Create a COVID-19 Cash Flow Forecast for Any Scenario

Many businesses in the United States are currently looking at a declining cash flow forecast for the next few months. The issue is declining profitability and low cash reserves, leading many small businesses to show increasing dependency on relief provided by the CARES Act stimulus package. In short – businesses that are struggling are those with cash flow issues. 

But, the current cash flow forecast for the next three months predicts that many businesses will feel the sting of reduced income. If you are a small business, it is time to plan for your future. 

Maybe you have enough cash flow to go buy that condo in the Bahamas, or maybe you don’t. If business expenses are $100K per month and your reserves stand at $400K, that means you have 4 months in reserve cash. If you have $10K in the account then it is much harder to keep your head above water when payroll comes due. 

So, is it a good idea to buy a condo in the Bahamas? How do you know without forecasting your revenue stream? But, how do you account for unknown global circumstances and uncertain financial factors?

The bottom line is that these uncertain times require cash flow to keep your business afloat. The stimulus money from the CARES Act has helped some, and others are approved – but for most small businesses, it’s time to get proactive and create your own cash flow forecast. 

Forecasting Your Revenue Stream

The first step in forecasting your cash flow for a variety of scenarios is to get a clear picture of your revenue stream. Your business’s revenue stream should be established, documented, and easy to revenue. What you want to think about, is what could happen in the future.

Your revenue stream is determined by your business’s client base. And, in times of financial uncertainty, it behooves your business to analyze the continuing viability of these clients. 

Organize Your Client into Categories

As goes your clientele, so goes your revenue stream. So, the first step to creating your business cash flow forecast is to classify your clients in terms of their likelihood to remain such. From there, your business has clarity on where its assets are of most value, and where there is extraneous resource expenditure. 

Create a list, in which you separate your businesses clients into five categories:

Sinkers and Floaters

Every business has clients that are wishy-washy, on-the-fence – or whatever you like to call it. They are unreliable in terms of their billing, and therefore they are likely to sink. Sinkers are current clients that you expect to be unable to continue their payments, based on the projection of increasing economic hardship to come in the next 12-months. 

There are clients which might – or might not – keep their heads above water enough to continue payment. But, in either case, a floater is more likely to panic, jump ship, and become a sinker in a few months. 

Fighters and Swimmers

Most of your clients are experiencing financial disruptions and struggling to maintain their own cash flow. But, many clients are able to do just that – even if it means making tough financial decisions and can be expected to keep paying their bills. These fighters are valuable clients, and probably make up the majority of your revenue stream.

Swimmers are clients that – for one reason or another – are experiencing good fortune during this uncertain time. And, that means they are the most reliable clients on your books. Swimmers are clients that you can expect to remain stable through the next three months. 

Prospects

Prospective clients are those which are not yet contributors to your business’s revenue stream but could be in the near future. Split your prospective clients into three categories of clients you are most likely to get, somewhat likely, and the long-shots. 

Prospective clients are not a direct contributor to the analysis of your cash flow forecast. They are essential, however, in the sustainability of your business cash flow, since some of your clients might become sinkers over the next three months. 

Plan for the Worst, Average, and Best Case Scenarios

Remember, that cash flow forecasting is about planning for the future. Organizing your clients into the above categories helps you forecast the likelihood of possible scenarios that can augment your business’s revenue stream. 

The actions your business takes should be based on your necessary profit margin. Your profit margin is your business’s total income minus expenses. 

Best-case Scenario Forecast

The best-case scenario involves the least economic repercussion. In this scenario, your business retains the vast majority of its clientele, while only losing some sinkers. This scenario enables your business to continue its normal expenditures without sacrificing its employees.

Average-case Scenario Forecast

The average scenario is a mix of normalcy, and hard decision making for your business. In this scenario, your business loses a few sinkers, floaters, and fighters. This reduction in clientele results in less money coming in, and a lower profit margin.

You can’t allow your business to go down because it can’t keep up with expenses, so it has to come out somewhere. In this case, you will be forced to cut down on hours, and even let go of a portion of your workforce.

But, before you go cutting hours or laying off employees, look into reducing costs across your business. You may have to cut travel, marketing expenses, and other extraneous expenses associated with your business. Labor is not the only place to cut down on spending.

Worst-case Scenario Forecast

The worst scenario is always the most prevalent in the mind of a business owner, but planning for the worst-case scenario is the best thing you can do for your business. The worst-case scenario is that your business is left with about 25% to 30% of your clientele. Your cash flow accounts for the necessities, but your business expenses simply surpass what’s coming in.  

This scenario is indicative of long term and widespread economic instability throughout the coming three months, but it is not all gloom and doom. Some new clients will still come in and most of your existing clients will still be there. 

If the worst scenario takes place, you have to be prepared to make difficult sacrifices in order to keep your business afloat. As a business owner, the hard truth is that cutting back on expenses only goes so far, before it is necessary to eradicate expenses. 

Final Thoughts

The number of employees that you cut from the payroll depends on your business’s ability to generate emergency liquidity. If you need immediate funds to satisfy your business overhead and payroll expenses, look into a line of credit. A line of credit can cover basic expenses and smooth out cash flow timing at a lower interest rate than a credit card.

Creating a reserve of cash, now, prepares your business for unforeseeable financial hardships in the months ahead. Creating a cash flow forecast for your business is essential to planning for the possible financial contingencies of tomorrow – so that you can afford that condo in the Bahamas. For more information and help creating your businesses cash flow forecast for COVID-19, contact Flattery & Family, today. And, if you find this article useful, share it with your social media community.

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