Says Robert Purtell, of Boardroom Capital, a New York City-based investment-banking firm, "If a company doesn't have enough cash in its checking account or adequate access to outside capital, it will fail." He advises:
1. Keep close tabs on your current cash balance.
2. Forecast sales for the next quarter (or any time period).
3. Analyze your normal bill collection to estimate average bill collection for 15, 30, 45, 60, and 90 days, and to account for bad debts.
4. Apply those averages to existing accounts receivable and projected sales, to forecast your cash position over the next three months.
5. Using sales forecasts, estimate the timing of your materials costs and other variable production costs.
6. Determine, for major variable production purchases, your suppliers' average acceptable interval to the first (discounted) payment date and to the last date before penalties.
7. Using those data, develop a best- and worst-case forecast to time payment of your variable production invoices.
8. Prepare a schedule of payments for such recurring expenses as payroll, rent, and utilities.
9. Forecast cash availability by adding your projected collection to your opening cash position and subtracting all variable production and recurring expenses.
10. If your ratio of cash available (balances plus receipts) to cash needed (variable production plus recurring expenses) is less than 120%, you may be in for trouble. "It really depends on the stability of your company," says Purtell. "The more stable the company, the smaller the number.
"Consider a range of remedial actions," he advises, "such as improving collection efforts to bring cash in more quickly." Tapping outside credit might help, but "ideally, companies should borrow to help achieve long-term goals, rather than for short-term working capital."