Updated April 2017 — Gassing up our cars is less expensive these days, thanks to gas prices tumbling to the lowest levels since the Great Recession. In Texas oil country, however, this means falling incomes for individuals and business owners tied to the energy sector — which has revved up concerns about cash flow.
Cash flow is the starting point for financial and wealth planning, say specialists from Wells Fargo Bank. It encompasses individuals and business owners of all types with many varying needs — retirement planning, buying that dream boat, or bridging a seasonal shortfall of cash, to name a few. And while, ultimately, it boils down to how much money you've got coming in versus how much you've got going out, when you're talking about business invoices, income from investments, and other types of assets, keeping on top of your cash flow gets more challenging.
"Many of our conversations about financial and wealth planning revolve around cash flow," says Amy Bracken, Senior Director of Sales for Wells Fargo Private Bank in Houston, Texas. And when Bracken meets with oil and gas clients, she says "Cash flow is not just a conversation about paying your bills this month."
Cash flow goes beyond an individual's budget. It's a critical factor in the business world as well. "When someone comes to me and says, 'I want to borrow money,' I want to see cash flow projections," says Denise Cahill, Senior Vice President – Director of the National Food and Agribusiness Industry Advisors for Wells Fargo Middle Market Banking in Visalia, California. "We need to start there. Understanding the thinking behind those cash flow assumptions is very important."
Businesses that fail to properly create a cash flow plan may face challenges when opportunities — such as an expansion — arise.
A company plotting big sales growth, for example, needs to realize that banks will finance only a portion of the inventory buildup and will also require owners to provide working capital as well, according to Cahill. "Rapid growth without the balance sheet to support it can lead to a company's undoing," she says.
"Cash flow is not just a conversation about paying your bills this month." — Amy Bracken, Senior Director of Sales, Wells Fargo Private Bank
Lenders tend to view a company heavily reliant on a single customer for sales as a greater credit risk because of the possibility that the customer fails to pay its receivables. "You want diversity in your customer base because if you do have a problem with one customer, it won't take down your whole business," Cahill says.
Because of the importance of cash flow planning, getting a plan in place early is a smart move. "You're in a better position to put together a financial structure with a bank when the need isn't a crisis or time sensitive," says Lawrence Katz, Regional Private Banking Manager for Wells Fargo Private Bank in Palm Beach, Florida. "It always reflects that the client is astute and forward-thinking."
Finding your strategy
Often clients recognize they need to plan for cash flow, but they don't know the most effective strategies, Katz adds. Cash flow scenarios run the gamut: How does a retired couple transfer wealth to their children without disrupting their comfortable lifestyle? How does an executive in line for a big year-end bonus facilitate a major purchase before the big payday arrives? How does a real estate investor pay for improvements to a shopping center that will probably boost occupancy and generate greater income?
The answer to those types of questions "often revolves around securing a line of credit to smooth out bumps in your cash flow," Katz says. Having that liquidity in place makes planning easier and allows you to pay for certain long-term expenses without expending all your cash.
"A banker can help with the what-if scenarios," he says. "Once we understand the broader goals of a client's wealth plan, we can often use the benefit of what we've seen in the past. We as bankers can see tripping points that clients don't always see."
A common stumbling block is projections that are all-too-rosy.
"People tend to be overly optimistic when dealing with cash flow," Bracken says. "But being conservative is important in cash flow planning."
After all, it's rare to run into problems because you have more cash than you expected at the end of the month or year.