With volatile price swings that impact wholesale, hedging, and operating costs, not to mention how much and when (and if) customers pay, heating oil companies and mechanical contractors face unprecedented cash crunches.

It is not sufficient to be profitable. You must have sufficient cash when you need it or you risk closing your business.

Inside Oil can forecast your monthly cash requirements for a twelve month period to help ensure liquidity. We typically generate two forecasts – one expected scenario and one worst case scenario. Knowing in advance the heightened cash requirements of a worst case scenario enables you to develop a plan should that scenario or something like it actually occur.

Our cash forecasting method:

• Allows you to compare expected (budgeted) cash flow to actual cash flow, which enables you to identify the source of the variance.
• Quantifies positive or negative cash flow by month, which helps you plan ahead rather than making last minute compromises and panicked decisions.
• Is able to adjust certain variables and run several worst-case scenarios, which will enable you to survive potentially devastating circumstances.
• Helps you organize your books to improve your ability to perform future analysis.

With this clear and organized picture of your cash flow and profit, you can:

• Understand the underlying financial drivers of your business. You will make smarter, more informed decisions going forward.
• Make the case to a lender that you are a responsible low risk borrower. Not only can this help you secure the loan but it may help you secure a lower financing rate.
• Make a compelling case to an investor or a buyer that you understand your business and that your company is indeed profitable. This will increase the value of your business in the eyes of others.

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An Example

As we can see from the chart above, the Expected scenario shows the business is operating at a deficit for 4 consecutive months (September through December) with a maximum negative cash flow (deficit) of about $70,000 in November. To continue operating (paying salaries, buying oil, etc.), the business must cover a total of $100,078 of deficit with spare cash or financing before the business begins to throw off cash again.

We can generate a corresponding report that describes these periods of cash shortfalls in detail so you can plan accordingly.

Potential Worst Case Scenario:

How much extra cash would you need if the price of oil spikes by $1 per gallon next December?

Answer: You would need an additional $507,738 cash (or in total 6 times the previous deficit) to continue to operate your business. (if you were the owner of a fuel company with sales of 2 million gallons per year)

As we can see below, the deficit period increased to 5 consecutive months (now September through January). Despite the fact that fuel costs increased only by about 70%, total cash required to keep the business operating, increased by more than 600% ($607,816). Or to answer the opening question, $507,738 additional cash is required. ($607,816 - $100,078 = $507,738). Lastly, the maximum requirement for cash in any one month nearly quadrupled (from $70,000 to $270,000).

Shocking... unless of course you could estimate that in your head.

Did you expect those results? If you did you would have been more prepared than someone who had not. If you did not expect an increase of that magnitude, you would have benefited from our Worst Case Scenario forecast.

In fact, it could have saved your business.