When I’m in the ocean captaining our sailboat between the U.S. and the Caribbean, I am constantly monitoring our fuel level and burn rate. Yes, it’s a sailboat but fuel is needed for the generator to make the electric that powers our navigation equipment, refrigeration, radios and sat phones, the autopilot, lights, etc. We also motor when there isn’t enough wind to sail, although we can’t motor for more than around 800 miles; which isn’t enough to go from Bermuda to the Caribbean or vice versa. So, fuel is important even on a sailboat and there are no filling stations in the ocean. I’m constantly computing our fuel burn rate and the fuel remaining in the tank. To do that I’ve developed a fuel burn graph which shows me how many gallons per hour we burn at the various RPMs of our diesel engine. Armed with that I monitor the RPMs on the diesel engine when we’re motoring. From time to time I use a dipstick to check the level of the fuel in the tanks. Running out of fuel in the ocean is not an option and it’s something a prudent Captain is careful not to do.

For any company, running out of cash is also not an option. When I am involved as a consultant in a Business Performance Improvement project, one issue I often contend with is cash flow deficits. Cash flow is the lifeblood of any company and cash flow deficits are the effect of an under-performing or troubled company. We have to gain an understanding of the cause but first we have to get spending under control. You can’t cut costs back to healthy any more than you can shut off the engine or generator on a sailboat and hope to simply get there (although on a sailboat you will eventually do that). You can, however, cut spending that doesn’t fully support a focused strategic plan which should be focused entirely on turning the company around. Doing prudent cost cutting enables an underperforming company to live another day and allocate scarce resources to get through the execution of that turnaround plan. So, in these consulting assignments I’m constantly monitoring the cash flow burn rate and cash availability to make payroll, pay vendors and lenders and execute the strategy.

To monitor cash flow, I usually start by developing a detailed Cash Requirement Forecast organized into the following categories:

BEGINNING CASH BALANCE

Add:

Less:

CASH AVAILABLE FROM OPERATIONS

LESS G&A EXPENSES

CASH SURPLUS OR DEFICIT

FINANCINGS AVAILABLE

ENDING CASH BALANCE

I usually prepare this Cash Requirements Forecast by week for at least three months and then monthly for the remainder of the fiscal year and one year after that. Beyond that forecasting sales is usually not a reliable exercise. But I”m monitoring the schedule on a weekly (sometimes daily) basis. That instills the spending disciplines necessary that is often missing. It also instills the disciplines needed to drive towards meeting other strategic goals, such as meeting new sales targets.

Just like I monitor fuel in the ocean, I’m constantly monitoring a client’s burn rate and cash flows, trying to reduce cash flow deficits and allocating scarce cash resources to better support the strategic plan. The objective is to get the client to reach its next safe harbor with fuel in its tanks while also eliminating the need for investors to be kicking in on Capital Calls.

If your company could use an outside look at cash flows to better focus its spending to support a focused strategic plan, give us a call. We’d be please to discuss how we could help.