You may have heard the saying, “cash is king”. Cash is essential for any business to survive, and good cash management is essential if the business is to prosper and grow.

It doesn’t matter what business you’re in or how profitable it is, if you run out of cash, and are unable to borrow money, your business will cease to operate. Profit is not the same as cash. You can be very profitable, but at the same time be short of cash. If you can’t pay your suppliers or employees then you will not remain in business for very long.

To remain viable, a business must maintain a positive cash flow, where the amount of money flowing into the bank account equals or exceeds the amount of money going out. Because positive cash flow is so important, many businesses will forecast their future cash requirements, enabling them to proactively take steps to avoid running out of cash.

Forecasting Cash Flow

Cash flow forecasting involves estimating cash inflows and outflows, and allows you to spot “negative cash flows” where the amount of money coming out of your bank account exceeds the amount going in. Such cash flow deficits can be addressed by increasing cash inflows, decreasing cash outflows, or obtaining short term financing such as a bank loan or a line of credit to fill in the gap.

Cash Flow Forecasting Models

A well-designed spreadsheet-based cash flow forecasting model greatly simplifies the process of forecasting an organization’s cash flows. The model should permit you to enter an organization’s planned cash receipts and expenditures for each future period, and automatically determine the bank balance at the end of each period. Any required draw downs or repayments of the line of credit should be automatically calculated. The forecasting model may also include a chart depicting cash inflows, outflows, line of credit available and line of credit utilized.

Arranging Financing to Cover Cash Flow Shortfalls

Despite best efforts to increase and accelerate cash receipts, and to reduce and defer expenditures, you may still have a requirement for short-term financing to cover off gaps in your cash flow.

Being proactive is important. Short-term financing should be negotiated before you require actually require the money. It is to your advantage to negotiate terms for a line of credit, or to arrange access to other short-term financing facilities, well before you need to draw on them.

It is helpful to build and maintain a good relationship with your banker. You should keep him informed of significant changes in your business that may affect cash flow, and of forecasted requirements for bank financing to fund the growth of your business.

Use a cash flow forecasting model to help you predict when and how much financing may be required. By demonstrating to the bank your ability to forecast accurately, you will establish greater credibility. The bank should perceive you as a lower risk borrower, and you should be able to negotiate more favorable lending terms.

Strategies to Improve Cash Flow

Methods of improving cash flow can be grouped into two broad categories:

1. Strategies to increase or accelerate cash receipts
2. Strategies to reduce or defer expenditures

We have listed a number of these strategies in the table below.

If you would like assistance in improving your cash flow management, please contact me at 613-727-1230 ext 212 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Richard MacNeill is a partner at OTUS Group, a team of business advisors to business and not-for-profit organizations.