Projecting Cash Needs

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BARRY ADAMS, TEMPLE UNIVERSITY PRESS

The AAUP Business Handbook >> Part Two: Accounting, Budgeting, and Financial Management >> Working Capital Management

Contents

Overview

Why is it important to project the cash needs of any business? One need only look at the reasons behind most business failures to understand the reason. Overwhelmingly, businesses do not fail because they fail to make a profit; rather, businesses fail because they do not adequately provide sources of cash when needed. If you have cash available, you can operate a business for quite some time without making a profit. Without available cash to meet obligations to vendors, creditors and employees, a business’s life expectancy is measured in days!

In an ideal world, receipts match cash outflows for materials, supplies, services and payroll with precise timing and exact measure. In reality, cash outflows precede revenue; you have to spend money to make money. Larger sales require larger expenditures up front. Thus, most businesses experience significant swings in timing between receipts and payments of cash. Further, many business experience seasonality of sales; university presses are no exception. Spring and fall course adoption seasons bring major peaks and valleys in sales and production expenses. Additionally, most presses experience swings in the number of books published year to year, either from growth or decline in acquisitions, causing more unpredictability in cash flows. It is the business department’s responsibility to ensure that cash is readily available to meet the daily needs of the press in order to guarantee the long-term survival of the business.

Granted, most university presses are not “freestanding”; that is, most of us are units of the university we support. As such, the university deposits receipts and maintains cash accounts in banks, pays invoices from vendors and service providers and processes payroll to our staff. Still, it is the business department’s responsibility as the financial arm of the university press to make its best effort to keep the university’s financial community informed about cash needs on an ongoing basis. This is done in a variety of ways from institution to institution, some more formal than others. Regardless, the process is the same whether cash management functions are “in house” with the press or provided as a turnkey service by the university.


Influencing Factors

There are a number of factors which influence the goals, and therefore the process, of projecting cash needs. These include:

  • Billing and Collections Policies and Procedures
  • Inventory Management
  • Number of Titles Published
  • Production Issues (complexity of text, timing of publication, etc)
  • Acquisition Policies (author advances, timing of launches, etc)
  • University Policies (reserves, accounts payable procedures, etc)

Each of these factors affects the structure of and effort required to project cash needs. However, the intent of this paper is not to describe these factors in detail. They are mentioned only to frame the complexity of the task of cash projection overall, and to show the impact of such projections on key operating processes essential to the success of the press.


Cash Forecast

How then does the business department manage such a complex process? By what method, using what tools? While the answer varies widely across university presses based on size, autonomy from/linkage to the parent university and other factors such as internal vs. external order fulfillment, the one common tool used in effectively projecting cash needs is the cash forecast. And while the style, complexity, frequency of preparation and updates and breadth of use of cash forecasts also vary widely, the essential components of this basic accounting tool are the same in all cases.

A cash forecast in its simplest form shows the beginning cash balance, expected cash inflows for a period, expected cash payments for that same period, and the projected ending cash balance. For example:

Cash Forecast: ABC Press
Jan. 1 - Mar. 31, 2005
Beginning Cash Balance $50,000
Expected Cash Receipts Sales of Books $750,000
Fees from Rights and Permissions $25,000
Total $775,000
Expected Cash Payments Vendor Invoices $350,000
Payroll $300,000
Other Payments $25,000
Total $675,000
Ending Cash Balance $150,000


From this forecast, we can anticipate sufficient cash on hand to meet our current needs. We also anticipate a surplus of cash on hand during the quarter beyond our ongoing operating needs, opening the possibility of short-term investments for the Press. Managing cash needs by optimizing the mix between investments and borrowings during the year can provide an additional source of income, vital to university presses in particular, most of which contend with an operating deficit.

Conversely, the cash forecast may show a deficit in expected cash on hand:

Cash Forecast: ABC Press
Apr. 1 - June 30, 2005
Beginning Cash Balance $150,000
Expected Cash Receipts Sales of Books $350,000
Fees from Rights and Permissions $25,000
Total $375,000
Expected Cash Payments Vendor Invoices $450,000
Payroll $300,000
Other Payments $25,000
Total $775,000
Ending Cash Balance $(250,000)


In this example, we project spending in the quarter well beyond expected cash balances available. A source of short-term borrowing in this situation is essential to continue the press’s operation.


Managing Cash Short-Fall

Presses operating “independently” will likely secure such arrangements from their bank, or through an arrangement with their university to move funds in and out of the press’s accounts as needed, whether for a fee or as an operating arrangement with the university itself. Presses for which their university provides more turnkey services for depositing receipts and paying invoices and payroll won’t have those arrangements to make and manage, but their university in the aggregate most certainly will.

For those presses, keeping their university’s financial community informed of such expected swings in their cash position for the months, quarters, and even years ahead are valuable tools for the university to manage its overall cash position effectively.


Long-Term Cash Management

Keep in mind that this represents a very narrow window of time on the short-term horizon. Effective cash management techniques also require a broader window covering a year or more using the same process, either on a twelve-month rolling basis or an annual forecast for the year ahead.

It is also important to note that collections experiences can be quite seasonal depending on the cash situation of your customers. For example, it may be easier to collect balances in June than in December as your customer's business experiences its own seasonality in its collection practices. Monitoring these patterns on a year over year basis will help refine your forecast.

Finally, you may find the need to adjust your collections forecast based on the changing mix of your customer base. That is, if your sales reflect more trade than text adoption titles in any given season, your customer base will be more heavily skewed towards wholesalers and retailers, who will have a different payment schedule of your invoices than college bookstores do, despite what your payment terms are. Anticipating these changes will also help produce a more accurate forecast.


Conclusion

Undoubtedly, the business manager focuses on the overall surplus/deficit position of the press, focusing on minimizing the university’s subvention to cover expected operating losses through effective accounting procedures, collection techniques and cost control methods. Of no less importance though is the need to maintain vigilance on the press’s cash position on an ongoing basis. It is not sufficient to simply assume that the university will “cover” the press whenever cash is needed. It is expected, as a financial professional, that the business manager will forecast cash effectively and regularly to maintain his role as a partner with his university’s financial community, and to therefore enhance the university’s perception of the professionalism of the press as a whole.


The AAUP Business Handbook >> Part Two: Accounting, Budgeting, and Financial Management >> Working Capital Management

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