Eugene Ball, director and board member of Colbert/Ball Tax Service based in Houston, says his company was gearing up for its best tax season on record. By all projections, Colbert/Ball Tax Service, a franchise that processed over 30,000 tax returns last year, was getting ready to double that number — but planned projections were interrupted.
In mid-January 2004, the company discovered a software glitch that caused the IRS to reject every return. “People started going elsewhere to process their returns, and we had a falloff in business that was not reflected in our cash flow projections. Last year, we did a little more than 30,000 returns, and this year, we increased our return rate by about 30% when we could have increased it by 100% across all 159 franchises,” Ball says.
Fortunately, Colbert/Ball Tax Service’s accounting department compiles month-to-month projections of revenues and expenses on a spreadsheet, paying close attention to its actual cash flow and charting the progress of its cash against the last six months of itemized spending and income information.
“We made an adjustment for the 30% loss in revenues, and the extra $60,000 in advertising by entering the data into the system,” Ball says. “Then we were able to adjust costs to fall in line with the new cash flow projections,” he adds.
Small business financial adviser Philip Campbell says it is critical for businesses to pay attention to cash flow projections because they are engaging in financial commitments that have a scheduled payback time and companies must have an idea of whether they can meet those financial obligations in the future.
“The only way business owners can feel good about making financial commitments in the first place is to have a realistic projection of their financial results — especially in the context of the impact that revenues and expenses will have on cash flow,” Campbell says. He also explains that most companies focus on income and profit and loss statements, but not on cash balance.
In the final analysis, Ball says that companies must have a handle on their cash flow. “You’ve got to focus on where the money is, how much of it you have coming through, and when it is going to show up.”
To better assess a company’s cash flow projections, experts advise taking the following steps to avoid a cash flow crisis:
Companies should create a financial spreadsheet covering the last six months of actual results in the context of the beginning and ending cash balance for each month.
Look at what is changing in your business. Campbell says this principle can help many businesses (especially businesses that are seasonal) to rationally plan ahead. “At this point, companies need to ask themselves what is changing that will make the next six months any different from the last six months,” Campbell says. He also notes that small business owners tend to be optimists and are confident that they will sell more or get new accounts.
Be conservative. For example, if you have a new marketing plan in place and you’re expecting an increase