How much cash do you have to work with?

It’s not always as simple as you think. But it is something you should think about.

Philip Campbell writes in his book, Never Run Out Of Cash, that there are two crucial questions you must ask yourself in order to eliminate cash flow worries:

The first question is simple, yet fundamental. Part of what Philip urges his readers to do is to keep the books up to date. If you don’t have time to do it yourself, pay someone else to do it.

But is the amount of cash in your bank account the amount you have to work with? This is why Philip poses the second question. If you go through the analysis to see what you’ll have in six months, you have to examine what happens to that cash over time. If there is seasonality to sales or inventory buying, it might mean that your $50,000 will be used up over the next 3 months without any change to your fundamental business.

A couple of nights ago, I attended a finance committee meeting of the board of a homeless organization I serve on. I had been Treasurer the previous two years, and had done some cash flow modeling for them early in my tenure – so I was familiar with the pattern of cash coming in and going out.

The board President asked the question – “we’ve run a surplus the last two years. I seem to remember we were roughly breakeven before that. Does that mean we have a pot of money to spend on new initiatives?”

The Executive Director and I looked at each other, and said at the same time – “well, it’s not quite that simple.” This organization, with about 20 employees and a steady case load, spends money fairly evenly throughout the year. But the cash inflow comes in fits and starts from local, state, and federal agencies, as well as foundations, religious organizations, and private donors. Throw in an occasional state government budget impasse, and you get some really interesting (and hard to plan for) cash flow patterns. For this organization, cash might swing up and down by $200,000 to $300,000 during the course of the year while essentially operating at breakeven.