Cash Flow is King


by Dan Taylor, Executive Vice President, Scott Valley Bank Northern Region

To me it nearly seems like yesterday, but it was thirty years ago that I sat in a college finance class. I recall one lecture I’d like to share with you. All four chalkboards were covered with various equations and cash flow calculations. Just prior to ending the class, the professor stopped, made sure he had everyone’s attention, and erased the middle section of the chalkboard. In that blank spot he wrote a message and proceeded to walk out without another word. What did he write? “Promise me anything, but give me cash!” The point to his lecture was “Cash Flow is King” as it pertains to valuation methodology, product pricing, debt coverage, account receivable collection, etc.

We are currently experiencing an economic period that has placed even greater emphasis on cash flow than most of us have experienced prior. To help your company, and to advance your relationship with your banker, the preparation of forecasted Financial Statements and a Cash Budget are essential. The preparation of the Cash Budget is an essential step as that tool will provide you with the necessary information you need as your business managers to forecast the cash needs of the company. It is a tool that will demonstrate your company’s ability to cover operating expenses, detail needed capital expenditures, and also uncover possible short term borrowing requirements.  

The preparation of a Cash Budget provides management with a forecasted financial plan that can then be compared to actual results on a periodic basis. After all, to make a plan but not refer to it defeats its purpose and will hamper the achievement of your goals. By monitoring the plan, you can take corrective actions as necessary, discuss results with key employees and fine tune your plan, enabling you a better likelihood of meeting your goals and objectives in a satisfactory fashion.

As a banker, the presentation of your Cash Budget, along with the reams of other paperwork you provide to us, greatly enhances the loan request. It provides us with detail as to your plan, and to the reasonable assumptions used to create the plan, on areas such as: how much you will need to borrow; when you will need to borrow; when the line-of-credit will be used and when it will be paid back; the detail of the repayment of term loan payments; detail of the turnover of accounts receivable and payables; and your plan for capital purchases. In short, your Cash Budget represents your plan for your cash position. It also represents how well in touch you are with your suppliers and others involved in the normal flow of your business.

If you need assistance in understanding or preparing a Cash Budget, contact your relationship banker and your accountant. We are interested in helping you maximize your company’s cash flow, which will allow for your company’s success in the future.

View Scott Valley Bank - The Vault - February 2012