The 13-Week Cash Flow Forecast

 

One of the best tools to forecast cash requirements is the 13-week cash flow forecast. It can help a business owner predict what their cash balance will be 13 weeks in the future. It helps to answer whether there will be enough cash to cover payroll and bills for a particular week. If you’re having significant ups and downs in your cash balance, it’s the perfect tool to help gain clarity around your cash needs. 

 

Thirteen weeks may sound like an odd length to select, but it’s the length of a calendar quarter. This is the length of a financial projection that is typically used when a business is in financial distress; however, it’s also useful when a company is going through some ups and downs or simply wants to get a better handle on its cash requirements.    

 

The forecast computations start with entering cash receipts and cash disbursements into a spreadsheet. Start with actual spending and receipts for the first week, then use estimates for the remaining weeks. Include planned expenditures such as overhead, payroll, and loan payments. Add in inventory purchases. Project your receipts based on history or recent changes in your business.

 

Once you’ve completed your forecast, you can make changes and do what-if scenario planning.  For example, if the forecast shows that you will run out of cash in week seven, you have some time to decide what you need to do to remedy the shortfall. Options might be:

 

• Accelerate the collection of 30 percent of your receivables.
• Dip into your line of credit to cover a portion the shortfall.
• Furlough 10 percent of your workers.

 

Plug your selected scenario into the forecast to see how much that relieves your shortfall. 

 

The benefits of creating a 13-week cash flow forecast are many. You can see what actions need to be taken and when to take them well ahead of time. You can also see how much of an action you need to take. For example, instead of furloughing 50 percent of your staff, you may only need to furlough 25 percent.  Or instead of borrowing $50,000, you might only need $20,000.

 

The cash flow forecast can also save time when developing your annual budget. Budgets are especially useful when business conditions are volatile or when business owners need all the clarity they can get. 

 

Try your hand creating a 13-week cash flow forecast for your business, or reach out to us for help any time. 

 

Business Owners—Taking Money Out of a Business

When taking money out of a business, transactions must be carefully structured to avoid unwanted tax consequences or damage to the business entity. If the loan and repayments are not set up and processed properly, the IRS can reclassify the funding as nondeductible capital contributions and classify the repayments as taxable dividends, resulting in unexpected taxation. A weak loan structure can also create a danger zone where a court can “pierce the corporate veil,” resulting in personal liability for the business owner.

Intermingling Funds

One of the most dangerous financial mistakes a business owner can make is to intermingle funds, such as paying personal expenses from the business checking account, or paying business expenses from the owner’s personal account.  This behavior can leave openings for the IRS or courts to question the integrity of the business entity. Failure to maintain complete financial separation between a business and its owners is one of the major causes of tax and legal trouble for small businesses.

Sole Proprietorships

A sole proprietor is taxed on self-employment income without regard for activity in the business bank account. A sole proprietor should never pay himself or herself wages, dividends, or other distributions. A sole proprietor may take money out of the business bank account with no tax ramifications.

   Taking Money Out - Wages

One way for a business owner to take money out of a corporation is through wages for services performed. Wages are appropriate only for C corporations and S corporations, not for sole proprietorships or partnerships.

Reasonable Wages

Both C corporations and S corporations are required by law to pay “reasonable wages,” which approximate wages that would be paid for similar levels of services in unrelated companies.  In a C corporation, wages are deductible by the corporation but dividends are not, creating incentive for a C corporation shareholder to inflate the wages for higher deductions. In an S corporation, wages are subject to payroll taxes but flow-through income is not, creating an incentive for artificially low wages.

Guaranteed Payments

Guaranteed payments to partners are the partnership counterpart to corporate wages. With guaranteed payments, there is no withholding for payroll taxes or income tax. These amounts are computed and paid on the partner’s individual Form 1040.

Dividends

Dividends are generally the means by which a C corporation distributes profits to shareholders. Amounts up to the C corporation’s “earnings and profits” are taxable to the shareholder.

Flow-Through Income—S Corporations and Partnerships

Income from S corporations and partnerships flow through to the shareholder or partner’s individual tax return.  Distributions of cash to an S corporation shareholder or partner are not taxable to the individual until the person’s cost basis reaches zero.

Loans

A corporation or partnership can receive loans from shareholders or partners, and can give loans to shareholders or partners. There is generally no taxable event when a corporation or partnership repays a loan from a business owner, and no taxable event when a corporation or partnership makes a bona-fide loan to a shareholder or partner.

Limited Liability Companies (LLCs)

A single-member LLC owned by an individual is considered a “disregarded entity” and is taxed as a sole proprietorship by default. If the LLC makes an election to be taxed as a corporation, either C corporation or the S corporation rules apply. An LLC owned by more than one individual is taxed as a partnership by default. As with a single-owner LLC, a multiple-owner LLC may make an election to be taxed as a corporation.

 

Five Expenses to Cut During Tough Times

 

If revenue hasn’t come back as fast as you expected it to, it may be time to review your budget and determine if some planned expenses can be cut. Here are five places to look to do just that.

 1-      Travel

 Since most events have been moved online or cancelled altogether, you can likely redirect any money you’ve budgeted for travel this year to other more urgent expenses. And if you have prepaid these items, you may be able to get a refund. Hotels have flexible refunds up to the date of the stay unless you took a prepaid deal.  And airlines have begrudgingly provided refunds, although in some cases, it did take time to get them. 

 Now that so many employees are familiar with Zoom and other videoconferencing tools, you may want to rethink any future travel requirements that could easily be accomplished virtually with a much lower budget.

2-      Training

  While it’s never a good idea to cut training, there may be ways to deliver it more affordably. You may be able to purchase subscriptions to online courses that include an “all-you-can-eat” component to them.  A good example is Lynda.com, now owned by LinkedIn. 

 Any unnecessary training that can be delayed is another way to free up funds. 

 

3-      Dues and Subscriptions

If money is tight, evaluating your memberships is one area where you may be able to free up money. Especially since many in-person events have been cancelled, this might be a good time cancel any renewals you are not able to fully utilize. 

Subscriptions are also something you can review.  Can any of these be cancelled to free up cash?  You can always re-subscribe when things get better.

 

4-      Employee Perks

 If you provide your employees with benefits and times are extremely lean, cutting them is an option to keep from laying off workers.  Some of the options might be: 

• Eliminating perks like movie day, free car washes, or onsite chair massages
• Stopping coverage of paid volunteer hours
• Cutting education expenses if you are paying college tuition for some employees
• Cancelling employees’ memberships and subscriptions as described above
• Slashing training budgets as described above
• Converting event attendance and sales meetings to online versions
• Disallowing overtime work
• Holding off on employee bonuses
• Reducing vacation or holiday pay
• Cutting down on health care options such as vision and dental plans
• Reducing 401(k) matches on a temporary basis (watch out for plan requirements, though)
• Cutting regular hours

 All of these are steps you can take to avoid having to reduce your workforce.

 

5-      Layoffs

 One painful place to look for more cash is your workforce. If work has slowed due to demand, you can raise cash by furloughing or laying off workers.  Unfortunately, many businesses have already had to do this.

 By looking deeply at all of your business expenses, you can find places to cut spending so that you will be in a better position for the future.