A couple of weeks ago, I was debating pulling the trigger on a high-cost course/certification that I had been wanting to tackle for quite a while. I mean, this thing wasn't cheap - it's a five-figure investment for the course and certification.
I decided the time was right and so I went for it!
So I'm talking to a buddy about it and he says "How do you even know if your business can afford something like this? I feel like when it comes time for me to make big spending decision I either get paralyzed and do nothing or I'm just crossing my fingers and hoping it works out."
Believe it or not, as an outsourced CFO and a business coach, questions about "can I afford to do this" or "how much cash do I need in the bank" are probably THE MOST COMMON questions I get asked.
Just like my friend said, most entrepreneurs get stuck in one of two places when it comes to spending decisions:
1. They get paralyzed and don't spend out of fear or
2. They spend but don't have a clue if it's a smart decision or not.
Both of those suck.
Surely there's a way to figure this out...
There's actually a pretty simple-to-use tool called a cash flow forecast and EVERY business needs to have one and use it on the regular.
I honestly believe that understanding cash flows and cash requirements is one of the most important skills a business owner can have.
OK, so what the heck is a cash flow forecast you ask?
It's just a spreadsheet that shows you the cash you expect to go INTO your business and the cash you expect to come OUT of your business in a given period of time.
Here's how a weekly cash flow forecast works:
1. On Monday morning, write down your current bank account balance.
2. Write down the CASH you are 80%+ sure is going to come INTO your account by the end of the week.
3. Write down the CASH you will be SPENDING by the end of the week (payroll, distributions, utilities, rent, subscriptions, credit card payments, literally ALL the things that will come out of your account by the end of the month!).
4. Now do some math: (Current bank balance) + (Cash IN) - (Cash OUT) = Estimated cash at the end of the week.
5. Repeat this process for each of the next six weeks.
CONGRATULATIONS! You just made your very own 6-week cash flow forecast.
I like to suggest businesses have AT LEAST six weeks worth of expenses in the bank at all times.
So, how do you use the forecast to help you make better spending decisions?
Plug that expense you're considering into the cash flow forecast. If that expense causes your forecasted balance to drop down less than what you'd need to have to cover 6 weeks of expenses - then you can't afford to spend it.
You should also take a look at how the spending decision you're considering will impact profitability (more on that in a future blog post).
The mechanics of this process might sound a little complicated so I made a video and a cash flow forecast spreadsheet that you can use absolutely free for your business!
I hope this is helpful!
PS - Ever heard of Profit First? Wanna know how it can help to make your business profitable every single month? I've got some GREAT new tools coming soon. Click here to stay in the loop.
Click below so we can keep you updated on the latest developments with the EIDL, the PPP, tax deadlines, and all the other important information you need to run your business.