By Joe Paterniti, Vice President / Enterprise Manager Energy Efficiency – Renewables at KeyBank
Effective cash flow forecasting is the difference between a business owner simply tracking money coming in and going out and instead using cash flow management to support business strategy and avoid need-solution scenarios that result in piecemeal financial planning.
Cash flow management is particularly important for solar developers, whose business models have to account for a significant gap in time between investing in a project and seeing a return on that investment.
Basic cash flow management starts with forecasting. Below are three steps to set up a cash flow forecast:
- Find the right method:
- Simply put, the right cash flow forecast method is one business owners understand and trust, whether that system is automated or based on manual data input.
- Be sure the cash flow forecasting method is paying off in terms of reduced borrowing costs or reduced effort.
- Determine forecast objectives, such as:
- Cash flow drivers—events or circumstances that have greatest impact on cash flow or take business owners by surprise.
- Determining cash flow surpluses or deficits.
- Estimating bank account balances needed to avoid overdraft fees and make the most of earning credits.
- Understanding data patterns for more effective cash flow:
- Data pattern analysis involves pulling together data—actual cash flows from bank statements, information about upcoming cash events and the relationships between business events and cash flow—and looking for trends and patterns.
Here are three steps toward effective cash flow management for solar development:
- Have a thorough understanding of a project’s total cost and sale price to accurately calculate profit. Things to consider:
- The cost to finance the project, such as loan interest.
- The cost to find a buyer.
- Hard costs, such as components, and soft costs, such as labor.
- Costs to store equipment and transport workers if the project is remote.
- Permitting costs.
- Know the project cost cycle. A solid understanding of how you move cash might help you negotiate terms with your suppliers, banks and customers. It’s a good idea to map out funds, from the cost to acquire the sale to payment in full:
- Know when loan payments are due.
- Know when suppliers are due payment for important components such as inverters, panels and racking.
- Know when workers need payment.
- Optimize your cash flow by finding the most efficient way to process transactions:
- Digital banking can allow you to make deposits and payments more promptly than relying on mail. Digital banking can also free up personnel for other, more important work.
- Weigh the benefits of paying cash up front in conjunction with supplier discounts, versus borrowing money.
This article is designed to provide general information only. Information and recommendations contained here have been compiled from sources believed to be reliable and represent the best current opinion on the subject. KeyBank does not make any warranties, express or implied, from the use of the information contained. We recommend that you seek the counsel of an attorney, accountant, or other qualified professional regarding these matters and their applicability to your situation.
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