Any Cash Flowing? How Forecasting Can Help You Now
Now more than ever, understanding and forecasting cash flow is one of the most useful management skills a studio owner can have.
Managing the summer cash crunch has always been familiar territory to dance studio owners. Joe Naftal grew up in the business—his parents founded Dance Connection in Long Island, NY, in 1989—and he can still recall his introduction to the idea of cash flow in a studio’s life. One summer afternoon, after exhausting his father’s supply of dollar bills to play an arcade game, Naftal begged him for change. His dad refused, gently explaining that because it was the summer, the dance studio’s cash flow wasn’t as steady as it was during the school year. “I was confused—both of my parents had jobs and worked really hard, so how could the fact that it was summer affect how much money comes in?” says Naftal. Now, as the studio’s marketing director, Naftal understands that cash flow is the lifeblood of a business.
The temporary closure of studios due to the COVID-19 pandemic has made managing cash flow more important than ever. Any business interruption—when typical studio enrollment and class offerings take a big dip—can be a minefield. But attentive cash-flow management is what will give your studio the breathing room to get up and running with online dance classes or other new revenue strategies you’ve come up with.
One Number You Should Always Know
You don’t need an accounting degree to understand cash flow. Like most studio business practices, what you need is attention to detail and a continuous look ahead based on what the situation is now. Think of it as fuel for a plane: If you run out, your business will crash—even if you’re showing a healthy profit. A 2015 study by JP Morgan Chase found that half of all small businesses only have a 27-day cash flow buffer at any given time. With proper attention and tracking, though, cash-flow problems can be identified—and handled—as early as possible.
Every business should have a cash-flow statement that is updated monthly. At the bottom of the statement, below your net cash—cash spent and received for operating, investing and financing activities—is your net change in cash. This number is the total increase or decrease in cash for your business for that period. You always need to know this number; otherwise, you won’t know what action is needed, whether it’s taking steps to speed up cash coming into the business, slowing down cash going out of it, or making a timely payment with your cash surplus. It will also help you decide whether it makes sense for your studio to apply for a small-business relief loan to make up for revenue losses caused by COVID-19.
Understanding Revenue vs. Profit vs. Cash Flow
Revenue, profit and cash flow are interrelated when it comes to the money generated and spent by a business. Revenue, or the sales created by your business (tuition, administrative and registration fees, recital ticket sales), has an impact on profit, since profit is your revenue total minus expenses (faculty salaries, rent, loan interest and utilities). But generating a profit doesn’t necessarily mean that you always have a lot of cash on hand; cash flow is about timing—the movement of money into or out of a business determines how much cash you have readily available at any given time. When studios have far less money coming in, most overhead expenses remain the same.
CPA Philip Campbell, author of the book Never Run Out of Cash, recognizes that the overlap of these terms can be confusing. “Small-business owners see on their profit-and-loss statement that they made $10,000 last month. But then they realize that they have less cash—maybe they started with $20,000, and now they only have $15,000,” Campbell explains. “But there will always be a difference between profit and loss and what happened to the cash.”
Predicting Cash Shortfalls
This is where cash-flow projections come in. By breaking out your estimated cash flow, month by month for the next year (use your previous year’s profit-and-loss statement as a guide), you can see what revenue typically comes in—and when—for your studio. In the current situation, where the business environment and your strategies are fluid, you’ll want to stay on top of this and update it on a rolling basis. Your expenses will likely not vary too widely, but your revenue (and therefore your cash flow) will. If you’re aware of potential shortfalls—lean months, for example, when your studio is not in session—you can normally take advantage of increases during the more lucrative months and plan in detail how you’ll use each payment as it comes in. For unexpected challenges, like having to temporarily close your studio because of the coronavirus, making new cash-flow projections as you get online classes up and running will help you get a realistic picture of the current state of your finances—and map out steps you need to take over the next few months.
Campbell’s method for staying on top of cash flow is surprisingly simple. He encourages small-business owners to be able to answer one question: What happened to the cash last month? “If you can name the three biggest cash transactions and explain why each is necessary to your business’ health or improvement, you’ll be regularly aware of your cash flow,” he says. You also need to think about what you expect the cash balance to be in three months and six months. This isn’t just an exercise for difficult times. Growing businesses are particularly vulnerable to cash crises as they increase their expenses or make new investments in their business, well ahead of the expected new revenues coming in.
Visit score.org, the mentoring website for small-business owners, to download both a one-year and three-year cash-flow-projection templates.
Rachel Rizzuto reports on studio business for Dance Teacher and is a second-year MFA student at the University of Illinois at Urbana-Champaign.
