Cash Flow Forecast Helps Business Owners Prepare for the Future

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Actionable Data Based on Current Conditions

By James Bailey, CPA

As we head into the holiday season, uncertainty clouds the landscape for many business owners, and the need to fully understand their cash flow – both now and in the next six to 12 months – is essential.

The COVID-19 pandemic appears to be resurging, raising questions about whether there will be new government-ordered lockdowns of businesses and schools, which could cripple the recovery of many companies still reeling from earlier shutdowns.

The upcoming presidential election raises questions about what will happen with tax policy and federal programs affecting business should there be a change in administrations.

Federal aid for businesses and individuals suffering economic hardship because of the COVID-19 crisis has become a political football amid election season posturing. Will there be additional funding through the Coronavirus Aid, Relief and Economic Security (CARES) Act? Will there be further Paycheck Protection Program (PPP) lending? These and other questions are still on the table as Congress has turned its attention to campaigning for re-election.

 

Cash flow forecasting

Amid the uncertainty, one of the most effective measures business owners can take to prepare for the future is cash flow forecasting, a detailed analysis of your cash going forward. Typically, a cash flow forecast examines cash flow from three primary sources: operations, financing and investments.

Cash flow forecasting can help you maximize cash flow and potentially take advantage of opportunities that arise in down markets.

A cash flow forecast utilizes historical data on revenues, payroll, expenses and overhead to produce forward-looking projections going out six months, 12 months and 24 months. Information about current and anticipated market conditions – such as a repeat of the COVID-19 shutdowns – is factored in to reach a realistic forecast. Analytical data includes various scenarios forecasting your business’s cash flow at 80% normal revenues, 60% normal revenues and below.

By providing realistic data, a cash flow forecast can help you make decisions about how to move forward. Will you need to lay off employees? Should you explore new financing? How will your financial statement be impacted?

Some business owners also will benefit from seeing solid data on the unusual costs related to the COVID-19 pandemic. For instance, many businesses are continuing to see significant increases in costs of cleaning supplies and labor related to protecting their employees and their customers.

A potential cost that must be factored into any cash flow forecast is tax liability for PPP loan funds. Currently, any expenses paid with PPP loan proceeds in 2020 cannot be deducted as business expenses on your 2020 tax returns, according to the IRS. This effectively makes PPP loan proceeds taxable. Members of Congress have objected, saying that was not their intent for the PPP program. However, Congress has yet to pass legislation to clarify that PPP funds are not taxable, so at this point you must prepare for a new tax liability on your 2020 tax return if you received a PPP loan.

Cash preservation is the name of the game for most businesses facing the uncertainty of today’s disrupted economy, and that means looking at all the variables that are considered as part of a cash flow forecast, such as maximizing income, and looking at vendor relationships.

Opportunities

As the economic downturn caused by COVID-19 continues, there will be a thinning of the herd as some companies don’t survive. As unfortunate as that is, it creates opportunity for those who have strong balance sheets and healthy cash flow. If you have the capacity to acquire companies that cannot survive this downturn, or to acquire equipment and leases, your business will be out ahead of the herd and able to take on more market share when we emerge from the COVID-19 crisis.

Strong businesses position themselves for success during depressions and recessions. That’s when they are buying to prepare themselves for the future when things turn around, so they can grab market share. But that’s only possible with a strong balance sheet and healthy cash flow.

As always, the more information and real-time data you have, the stronger position you will be in to prepare your business for the near future. Cash flow forecasting provided by the Adams Brown Client Accounting Services team can help arm you with the information you need. Contact your Adams Brown advisor for further information about a cash flow forecast for your business.