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Essential Reports: The 13-Week Cashflow Projection

"Control your cash. Stick to your core business. Know your numbers." This is sage advice from Marcus Lemonis, CEO of Camping World, and you'd be wise to follow it in the order that he prescribes. Cash flow management is paramount and fundamental because businesses die when they run out of money.


One of the tools we use to control cash is the 13-week cash flow projection. It tracks your anticipated cash inflows and outflows weekly over three months and has several benefits. First, it helps management better understand its cash conversion cycle, or how long it takes to convert an investment into cash from sales. Second, it forces management to monitor its cost structure closely. Finally, the 13-week cash flow projection strengthens management's ability to forecast.


Understanding Your Cash Cycle


At Financial GPS, we work with agencies primarily. To control cash, agencies need to track the number of days in A/R as a key financial metric. Days in accounts receivable measures how long it takes to get paid after sending an invoice.


A Screenshot of the 13-Week Cashflow Project

In the screenshot above, this agency has $444,200 in accounts receivable. After calculating # of days in A/R to be 45 days, they can estimate how much cash they'll collect in the current week. In this case, they expect to collect 69K (444,200/45 * 7).


Once you know your # of days in A/R, you can negotiate terms with vendors advantageously. If it takes 45 days to collect, you'll want to pay net 60. If you pay vendors before you get paid, you are in "a negative cash cycle."


Fixed expenses, like rent and payroll, must be paid frequently. Rent, for example, is due every 30 days, and payroll every 15 days. You probably won't be able to collect A/R before fixed expenses are due, which creates a negative cash cycle. This is where credit lines and cash reserves are helpful. You should always keep at least 3 to 6 months of fixed expenses in cash. Three months is 2x the number of days in A/R in the example above.


Monitoring Your Cost Structure


I like to group agency expenses into four buckets: FTE costs, contractors & professional services, debt service, and non-recurring expenses. Full-Time Employee Costs as a category is probably the single biggest recurring cash outflow. FTE costs must be managed meticulously with an eye on efficiency and maximum Utilization. The agency business is not easy, but success is straightforward and simple. Agency Profit =Margin x Rate x Utilization. Utilization, or the # of billable hours, is the name of the game. FTEs have to register high utilization rates.


I differentiate between contractors and professional service firms. Contractors work on client work. Professional service firms do admin work. Admin work is essential, but client work takes precedence. If cash flow is tight, pay your contractors before your services firms.


A screenshot of the 4 Cash Outflow in the 13-Week Cashflow Projection

The next cost category is debt service. Agencies typically use credit cards, credit lines, and long-term debt (like a SBA loan). I recommended running all non-personnel costs on a credit card. This gives you a 30-day float, and credit cards offer rewards and reporting features to help you analyze expenses. Your FTE expenses go through a payroll service, and contractors get paid via Bill.com. Everything else, SaaS, rent, and office supplies, must be paid via credit card. In the debt service section of the 13-week cash flow projection, the rolling average credit card payoff amount is captured in the week it is due. Credit card bills must be paid in full every month.


The last cost category is non-recurring expenses. They need to be scrutinized and planned for my management. Given the multifaceted nature of business, non-recurring expenses can come from anywhere - marketing, operations, financial, leadership, or otherwise. Communication and collaboration are needed to ensure non-recurring expenses are captured well in advance.


Management's Ability to Forecast


Your ability to forecast cash flow shows how well you can operate your business. In the investing world, the value of a company is the present value of all future cash flows. Good operators increase cash flows, thereby creating more value for the company. To increase cash flow, you need to forecast as a baseline to make decisions.


Once you understand your existing business model's cash conversion cycle and cost structure, you can innovate, change strategies, and adopt new tactics to improve the business. As you make bets, your 13-week cash flow projection will help you register wins and losses and evaluate your performance as a manager. Everything in business comes back to cash flow. Every hire, every campaign, and every new service launch must be assessed through a cash flow lens. What impact did I forecast this initiative to have on cash flows, and what impact did it have on cash flow?


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