In part one on making financial projections, we looked at the impact of timing and inventory purchases and the sale of those items on cash. This time we look at some of the other operational aspects that require cash, fluctuate with the level of activity, and are commitments to spending that the company must make.

One of the most significant outflows (and largest commitments) of cash is payroll and payroll taxes. Just as significant are taxes—income and sales and use taxes. These outflows are legally defined and timed based upon operations, compensation levels, and legislative calendars. Often when budgets and financial projections are compiled, these numbers are pulled together on an annual basis and spread across the year evenly (dividing by 12). The reality of payroll and taxes is that they are costs that fluctuate in relationship to hours worked, number of workers, and revenue levels.

Let's talk about them one at time, starting with payroll. The staffing of your company will most likely be comprised of hourly and salary workers. You may opt to use part-time and full-time workers, either as regular or temporary workers. How you staff and the variability of the hours worked, as well as the mix of workers, will define the level of cash demanded to cover payroll and the related taxes. Some weeks you may have staffing at 120 hours a week, other weeks it may be higher or lower. You may have different workers making different wage rates and they may not work every week (or pay period). Payroll and tax projections need to be realistically captured and timed so that the cash impact is reasonably estimated.

Similarly, sales and use taxes, as well as income taxes, vary by the types of transactions and magnitude of transactions. Many companies that sell products deal with multiple sales and use tax levels based upon who is buying the product. Transactions may be fully taxable (state and local taxes), taxed at a special rate (1%, for example), or tax-exempt. While 100% may be possible, capturing directional cash impacts and planning implications within your business is the goal.

Since cash is the lifeblood of business, it is necessary to make the effort to capture as closely as feasible the sensitivity of cash and profitability on volume, mix (the variation of product/service types purchased and volumes of each), and other factors. The interdependence of operating efficiency and financial results is in part a by-product of the structure of the business and the decision-making criteria employed.

The examples above just touch on some of the basic elements and potential complexity that organizations face in understanding the impact of:

• Product and service offerings
  Variety
  Levels
  Volumes

  •Structures and processes
  Customer Support and Service
  Administrative
  Technical
  Production/Operations

  •Customers and Suppliers
  Number
  Type
  Category
  Levels of service
  Frequency of purchases
  Credit terms

There are both internal and external drivers and factors that impact the ability of any business to fund itself through operations (sales of products and services), manage cash excess (the best case), and cash shortages (frequent reality). The ability of the organization to forecast, plan, prepare, and take action to mitigate the impact of cash position on the business is one of the most critical aspects of business: planning, operations, and financial success.

In preparing even a basic financial statement projection, it is important to keep the following in mind:

• Identify the activities and processes that are critical to serving the customer
• Understand the cost of the processes

o People
o Time
o Technology
o Cash

• Understand the sensitivity of your operations to delays or changes in

o Vendor credit terms
o Customer late payments (or no payments)
o Lines of credit terms
o Debt and/or equity covenants
o Volume fluctuations
o Pricing
o Competitors
o Other external factors

• Have contingency plans for worst, best, and most likely levels of operation

You may not have all the answers to the questions. By having the questions and beginning the process of finding the answers, you draw closer to financial success.