Building Baseline Cash Flow

If you’re currently in business use your company’s past cash flow information to look for strengths and weaknesses in building cash for your business. Once you collect this information you can perform the 1% improvement test. The 1% improvement test takes your current cash flow numbers, improves each factor by 1%, and shows what your cash flow would be if all of your cash in and cash out was 1% better. Once these improvements have been calculated, determine how you could achieve these 1% improvements.

How to do cash flow planning:

  • Cash flow is driven by market and operations plans. – Sources and uses of cash
  • Start with the cash flow plan for the business as it exists today.
  • Determine where leverage comes from with the 1% Improvement test. Perform the 1% improvement test by calculating cash flow as though sales volume, sales price, and costs have improved by one percent. Review marketing and operations plans to identify actions that could produce the 1% improvements.
  • Adjust the baseline cash flow based on changes to sources and uses of cash identified in the marketing plan
  • Adjust the baseline cash flow based on changes to sources and uses of cash identified in the operations plan
  • Create cash flow projections based off of business plan
  • Review if cash flow supports the financial goals for business, is it valid and achievable
  • Get feedback, critique, and verification – test your theories
  • Perform sensitivity analysis on cash flow to identify areas and magnitude of risk – find sales needed to break even if a worst case scenario materializes. Find sales needed to break even if a best case scenario materializes. Determine the cash flow’s sensitivity to change in sales, cost of goods, operations, and other to determine areas that may provide a high magnitude of risk to your cash flow.

When doing cash flow planning ask yourself the following questions:

  • What is my first line of defense if sales don’t materialize as planned?
  • Can I justify the major uses of cash?
  • Do I have the right sources of cash?
  • Have I validated the major assumptions used?
  • Have I staged the risk as best I can?