Forecasting cash flow - Workstyles - column

Home Office Computing, Oct, 1991 by Nick Sullivan

Last summer I taught an adult-education seminar entitled "Running a Home Business with Your Computer." Some studens wanted marketing ideas, some business-development ideas, and one person even wanted to know which computer to buy. But there was one thing they all wanted to know--how to manage their finances.

"My business is growing fast and I want to get control of my finances before it gets too big," said one woman, who sells health and nutrition products. The man who hadn't yet bought a computer was fretting about his shoe box full of invoices and receipts. He wanted to scan them into his computer and let the microprocessor take over. "You'd laugh if you saw my accounting system," he said.

I could identify with these voices, since I spent five years gearing up to automate my financial record-keeping before finally computerizing last January. Hearing the high lonesome cries of manual accountants wandering in a forest of paper, with guesstimates as their guides, reminded me that I've still got a ways to go myself.

I started using Quicken to write checks and record withdrawals and deposits for three reasons: (1) I wanted to keep more accurate records, so that I always knew how much money I really had at any given time; (2) I wanted to ease tax preparation, by keeping consistent records of spending in various tax categories throughout the year (and thus avoid the April shoe-box syndrome); (3) I wanted a handle on future cash flow, so that I could better judge the impact of periodic capital expenditures.

The first two goals have been achieved. I walk around with a balanced checkbook. Bank statements and my register don't always match, but they are close, and the monthly ritual of electronic reconciliation patches up any errors. I don't need a computer to do this, of course, but reconciling by hand (or with a calculator) is a more daunting task. As for tax preparation, I'm licking my chops in anticipation of pumping out reports for spending in key categories. Until I actually do it I won't be sure that I've got the categories set up right. I've already found a few mistakes and am constantly fine-tuning. Nonetheless, I know I'm on the right track.

With my basic system operating as smoothly as could be expected, I now must turn to cash-flow forecasting. That's the real reason I computerized in the first place. Automating my check writing gives me a record of where I've been; I want to know where I'm going.

With two imcomes (one of which fluctuates, since my wife is self-employed), two sets of business expenses and tax forms, and two checking accounts, I found that I never knew how much money we had. One day we'd be rich, the next we'd be poor. We'd get a big check one week and pay it out in quarterly taxes the next. Then we'd get hit with a balloon payment for taxes or insurance or computer equipment and immediately dip into overdraft mode at the bank.

We were never in financial trouble, but we did feel out of control--the same floundering feeling that was pestering my students. How can you make sensible decisions if you never know where you stand financially? What if you make a bold move that turns out to be a financial disaster because you overlooked key information?

You can balance a checkbook and create a cash-flow forecast without a computer, but I never did. There's something about using the computer as a glorified calculator that makes the task more appealing. You write (or type) less than you do with a manual system, since each recurring payee is listed once and then invoked with a mouse click. You do no calculatingm since the computer takes over. And you can generate a variety of profit-and-loss, cash-flow, and spending-by-category reports that you can't do at all with a manual system.

Following the instructions in Quicken, I copy the file for my checking account, and save it under the name Cash-Flow Forecasts. Then, for a six-month period (or as far ahead as you can reasonably predict income and outgo), I enter expected payments and deposits.

If I were doing this with pencil and paper, I might easily overlook future expenditures. But since I've been recording past expenditures in my computerized check register. I have every likely payee listed as a "recurring transaction." More important, I've recorded every single cash withdrawal, the major cause of leaks in my financial ship. "Cash" is such a nebulous category that I'm not likely to think of it the same way I do mortgage, insurance, or tax payments. (Money spent on entertainment and gifts is also difficult to track without computerized checking.) But, in less than five seconds, I can generate a report indicating how much cash we've withdrawn from the bank in the last year. Thus, I can reasonably expect that we'll continue at more or less the same rate.

Once I've entered all expected payments, deposits, and withdrawals, my register balance tells me immediately whether I'll be in the red or the black after six months. If I wanted more detailed reports, as any business with a payroll or creditors would, I could generate daily, weekly, or monthly cash-flow reports. And, of course, I can play what-if games, adding or subtracting large expenditures or deposits to see where we can or need to expand or contract. I used to do this in my head, but seeing the figures on paper is more practical.