Here is my thesis: Cash Projections are overrated and often a waste of time. I know that sounds like heresy coming from a CFO, but let me make my argument.
Cash is Important
First, cash is important to a business, of course it is. In fact, cash is to a business as blood is to our bodies. Without cash, a business dies. My premise isn’t that cash isn’t important. My premise is that Cash Projections are overused and often a waste of time.
I approach a business this way. Cash is most important in the short-term. After all, if we can’t make payroll on Friday, it is game over. In the mid-term, profit is most important. This assumes the urgent needs for cash have been met in the short-term. In the long-term, increasing enterprise value is the most important thing.
That’s the order from shortest-term to longest term: cash, profit, enterprise value. Of the three, profit is most important. That’s because profit usually drives cash flow and profit is also the biggest factor increasing enterprise value.
The Time Spent on Cash Projections
The time spent on Cash Projections is proportional to how tight cash is. Most clients do monthly Cash Projections. When things get tight, they do weekly Cash Projections. I’ve seen and done Cash Projections that are daily. And one place I worked, I saw Cash Projections that were broken down by morning and afternoon, each day. In the morning, the checks that cleared the previous day were posted. In the afternoon, we deposited collections and determined which checks to vendors would be released. We had a huge system, parallel to the accounting system, just to track cash.
If that sounds time-consuming, it was. In fact, at that most extreme example, over 50 percent of the accounting staff’s time was spent managing cash. That huge effort was necessary under those extreme circumstances, but it did not add value to the business.
My Point
That’s my point. Cash Projections should be done as necessary but they are not a value-adding activity. The struggle I have is that Cash Projections for most business owners provide security. They provide confidence that the business is “okay.” But to continue to prepare Cash Projections long after the business is beyond cash problems is a waste of time.
Where You Want to Be
This is where I want clients to be. First, they need good, accurate, timely, accrual-based financial statements. That is, we need to be able to measure profitability accurately. Then, using that information, we need to use that good information to pull on the “profit levers” and get the company solidly profitable on a sustainable basis. I’m talking about at least ten percent profit at the bottom-line month-after-month.
In time, this kind of profit will usually lead to debt being paid down to a prudent level and excess cash being accumulated on the Balance Sheet. I say usually, because there are sometimes aberrations we need to watch out for, such as collection problems or the need for big capital expenditures. Short of these exceptions, we start worrying less about short-term and start looking out further.
With several of my long-term clients, we have good sustainable profit, we have low debt and we have cash reserves. Cash Projections? We look at the cash position for about two minutes a month and move on to important stuff.
Important Stuff
What is important stuff? Stuff that increases and sustains profit. Better to do Profit Projections rather than Cash Projections. Better to add to the sales funnel. Better to reduce costs. Better to help your employees be more successful. All these activities add value to the business. All these activities increase profits.
What If Stuff Happens?
What if something happens that impacts profits in a big way? Something like, I don’t know, a pandemic? If profit is suddenly impaired, then certainly it probably makes sense to reinstate Cash Projections as part of your planning processes. Until then, get your accounting staff to help the company make more money.
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