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The Cash Flow Crystal Ball: Your Pro Forma Statement

Article | April 4, 2019

Analyzing your cash flow, annually, quarterly or even monthly helps you understand cash flow patterns and react appropriately to increase profitability.

A clear ball full of money

These uncertain times add challenges to running your business. But you have a “crystal ball” in your control to help manage your business future and position your company for profitability. It’s your cash flow pro forma.

As a business owner, you know cash flow for your company is like rainwater for a farmer’s crops—neither will survive without it. Analyzing your cash flow, annually, quarterly or even monthly if you need more granularity, helps you understand cash flow patterns and react appropriately to keep your business moving forward.

Setting up Your Pro Forma

If you’re building your first pro forma spreadsheet, consider starting with an annual review. You’ll be able to evaluate the seasonality—the ups and downs—of your business across the full calendar year.

  • Line up the months across the columns of your spreadsheet using a calendar year or your fiscal year.
  • Down the left side of the sheet, list every line item you expense including payroll, taxes, insurance, rent, cost of goods, cost of services, marketing and advertising.
  • Now, begin to fill in your actual revenue and expenses, using data from January through March, the calendar quarter just completed.

The remaining months of the year will be projected. You may not know the future, but you can use the past and your experience to develop reasonably good estimates…

  • Use historical information to plot future revenue and incorporate your knowledge of sales patterns into the pro forma. Do you see a seasonal increase in sales during June and July? Is the December holiday season slow for you? And if you are expecting increased sales due to a planned promotion, or know you are losing Customer M after the second quarter, factor those changes into the revenue stream.
  • Then begin to fill in your line-item expenses. Many of these monthly outlays are fixed costs, like payroll, rent and taxes and will be consistent across your proforma spreadsheet.
  • Deducting expenses from monthly revenue will give you a positive or negative cash flow. You now have a clear line-of-sight into opportunities for improvement.

Using your Pro Forma Crystal Ball

Your completed pro forma helps you assess the health of specific areas of your business and plot a course of action based on your findings.

Ask and answer these questions:

  • What is the ratio between payroll and revenue? If you’re a manufacturer, payroll should represent about 30% of your sales. Food service companies may have a lower ratio, while service organizations could have a ratio close to 40%. But if your payroll represents 50% or more of your revenue, then you need to increase revenue, decrease payroll or both.
  • What is the ratio between overhead and revenue? Ideally, expenses like rent, insurance and taxes should be 10% or less of your sales. Examine the line items to determine where you should make changes, such as renegotiating your lease or relocating,
  • What is the value of your inventory compared to turn rate? If your inventory only turns once a year and you have a substantial inventory balance, consider reducing inventory levels. You’ll have more cash to use for the business.
  • How are your accounts receivables collected? Evaluating the receivable collection pattern tells you when cash will be available. You may have substantial revenue in June, but if you don’t have 80% of those receipts collected in 30 days, you’ll struggle with cash flow.

The Power of the Pro Forma

Your cash flow pro forma is a data-based tool for managing your business, helping you uncover how to win.

Historical information gives you a solid foundation on which to build for future success.

  • You can, for example, model what happens to cash flow if you adjust payroll, overhead and receivables.
  • Or you can see the impact on summer cash flow by penciling in a 5% increase in marketing and estimating a 10% gain in revenue.

A data-based approach to managing your business provides a rational framework for making decisions. Some of the decisions may be difficult, but you’ll have sound reasoning behind them.

  • Your pro forma may show cash flow will suffer if you boost your inventory expense by $15,000 to produce the ultraviolet widget for Customer R. You may lose Customer R but if your existing mix meets demand, you’ll keep your cash flow healthy.

You can determine your own future by using your cash flow pro forma and asking some basic questions. If you need support setting up your cash flow pro forma contact our team for a consultation.


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