Chapter 11 -
Reports on cash forecasts

Cash forecasting should be routine, but it doesn’t have to be complicated. Annual budgeting systems help forecast cash peaks and valleys. For any period – a day, a week, a month or a year – you forecast cash flow by using the formula in Table 11-1.

Elements of forecasting
A good cash forecasting system has several elements:

Disciplined accounting practices
Reliable cash flow forecasting starts with an accounting department that is up to date every day on entering accounts payable invoices, sending out customer invoices and posting accounts receivable. Your system also should reconcile all bank accounts and liability accounts each month.

Established receivable collection patterns. Estimating collections from customers can be difficult, but it’s an essential step in forecasting cash balances. Computerized receivable programs often report the average time that a customer receivable remains outstanding.

For example, if your overall collection rate averages 30 days, then you will collect, on average, all of August’s sales in September. Thus, you can forecast any month’s collections based on the previous month’s sales. If it averages 45 days, your forecasted collections in September include part of July’s and part of August’s revenue. Your accountant can help you establish a collection forecasting routine. It’s important to remember that it’s impossible to be 100 percent accurate because you’re forecasting customers’ payment behavior. It’s best to do a best-case and worst-case forecast and assume the worst.

Payables due dates for operating costs
If payables are entered daily with a due date, most accounting programs provide a weekly forecasting routine to show totals due four to 10 weeks in the future. Knowing your planned weekly outflow on payables is essential in spotting heavy cash-outflow periods.

Debt and other disbursements are often not entered as accounts payables. Ensure that your forecast considers routine monthly bank notes, lease payments and planned officer disbursements for payroll, dividends, income tax payments and other non-routine cash outflows.

Prepare a separate yearly “capital equipment budget” for anticipated equipment purchases. While many lenders will finance your purchase 100 percent, this is not always the best practice. Even most leases require some up-front payments, so consider equipment down payments or advance lease payments in your routine forecasts.

Bank line of credit calculations
Banks and other lenders have a maximum amount they can loan on accounts receivable balances. They either will establish a fixed limit or a floating limit based on the composition of your accounts receivable balances.

If you borrow from an asset-based lender, or your bank offers you a line of credit based on A/R, often you must prepare a monthly report on aging A/R. In this case, your customers are assigned a credit rating, and you can borrow more on higher-rated customers’ receivables than on all others. The highest-rated customers are sometimes termed “credit-grade.” For these, your lender may establish an 80 percent borrowing limit. For others, it may be as low as 40 percent. Table 11-2 is an example.

Annual budgeting and forecasting
Want a longer lead time on tight cash flow times? It starts with an annual budget for the company. Few small trucking companies – and not all large ones – prepare annual budgets with a monthly breakdown. Budgets are important for many reasons beyond forecasting cash flow, but that is one of their main benefits.

Preparing annual budgets doesn’t need to be a horrendous exercise. With electronic spreadsheets and newer software, it is quite easy once someone shows you how.

First, project the P&L, then convert it to a monthly P&L and to a cash format for a cash forecast. Start with a three-year history of your P&L statement, side by side from oldest to newest, on an electronic spreadsheet. Immediately you’ll notice patterns and similarities. Add a blank column for the coming year. The roughest budget simply can be your estimate of the next year based on the three-year history.

Budgeting can become quite sophisticated. Superb budgeting begins with a good revenue projection based on contracts and customers. It requires projecting revenue by customer, lanes and freight type. Budgeted expenses for drivers, fuel, repairs and other operating expenses stem from these projections because they are based on estimated mileage or number of loads. Finally, you can estimate overhead based on history and known commitments.

Seasonal cash flow peaks and valleys
Once you prepare the annual budget, break down revenue over your fiscal year to build a monthly budget. Revenue almost always is uneven; if your company has $1.2 million in annual revenue, rarely will a month’s revenue be exactly $100,000. You probably will have several months in the $75,000 to $85,000 range and a few in the $125,000 to $135,000 range.

It’s important to know the peaks and valleys. While moving from lower-volume months to higher ones, your cash flow naturally will get tighter as you spend more money in purchases and payables, and as your money gets tied up in your revenue and receivables.

The reverse is true for moving into slower months because your receivables collections tend to speed up in the month or two after a month of big mileage. Your monthly cash forecast system, expanded over your entire fiscal year, will expose your cash flow peaks and valleys.

In Summary
Monthly or weekly cash flow forecasting should become as routine in your company as regularly scheduled fleet maintenance. It starts with disciplined daily accounting practices and annual and monthly budgets.