Here’s a tool I use (Leapfrog Spreadsheet) with some of my clients who need to manage for breakeven cash flow on a monthly basis. I call it cash flow leapfrog because it demonstrates the link between revenue when booked and cash when it comes in the door. This tool works best when a company has a relatively level cash disbursement profile and revenue is recognized in irregular chunks. If you want to play along at home, open up the file and follow along.
- For the current month and subsequent months put in your customer name and the amount of committed (or booked) revenue in the appropriate month. This should be only revenue that you are sure of – you have a signed contract, it’s a multi-month project or you have some other assurance that the activity will take place.
- For each item above, put the amount of cash collection in the month you are sure to collect. Sometimes this will be in the next month, sometimes in the second following month. Doing this will highlight customers that are good targets for efforts in speeding up collections.
- In the middle section put those revenue items that you think will take place, but don’t rise to the level of committed. At this time do not put any anticipated cash collections for these items – do that when the projected revenue items move into the committed category.
What’s the purpose of this exercise? At a glance you will be able to see if your revenue for this month and subsequent months is enough to break even. As you look at next month and the month after you will see what you have to do to get there – do what you have to do to move those projected revenues to committed revenues. Also, you will be able to see if your cash collections will be break even at least a month in advance and be able to take appropriate steps to bring in the money.