Is Cashflow Forecasting For Me?

People ask me – what is Cashflow Forecasting all about and what are key points about it? Well, I usually start with:

Accounting packages are about the present and yesterday. Wouldn’t it be great if you knew what your cash was going to be tomorrow, next week, next month…well…you can, that’s where Cashflow Forecasting comes into its own.

For me it’s your No.1 business management tool – live without it at your peril…

You can forecast Monthly, Weekly or Daily from; what is my cash going to be tomorrow to weekly cashflow over the next 12 weeks to monthly cashflow over the next 12 months or more. Is it easy? - not always, usually isn’t, it takes a bit of time, thought and effort. Is it worth it? – absolutely, no doubt, no business should be without one.

In general, businesses find costs relatively easy to forecast as many costs are recurring, like salaries, rent, utility bills and the like. The fun starts when you have to forecast SALES!!! Yes that dreaded where are the NEW sales coming from and when!!! But it’s here where the effort needs to go as the more accurate and HONEST you can be the clearer the picture will be going forward. So depending on what type of business you have will determine how this is done, e.g. a retail shop could put in a headline/overall sales value for the business, or break it down into departments or into product types (like frozen, fresh, ambient etc. for a grocery). Whereas another business works on contracts won and stage payments - then you would add these payments in as expected.

I’m a stickler for not adding tendered work into your main forecast as it can really cloud what your true forecast is. I believe it’s better to keep this separate so then what you’re looking at is your genuine forecast (i.e. worst case scenario: what is my cashflow if we win no new contracts). This will give you your ‘cash runway’ – so people will ask how long is your cash runway (i.e. when do you run out of cash?) So, it may be that if you can say 6 months or more then that may be great for your business (i.e. if you win no new contracts you have enough cash now and coming in to last 6 months before running out of cash – hence your cash runway). On the other hand, a cash runway of only 4 weeks sounds just a little more critical to me (i.e. we run out of cash in 4 weeks!!) – now we can see that if tendered work were added here it could hide vital information that the business needs to focus on cash generation now and not in 3 1/2 weeks’ time when the cliff edge is in sight!!

And it’s not rocket science – so for example, creating a monthly forecast: it starts with what cash you have at the start of your current month, then add your forecast cash in for that month and take away your costs for that month. You now have your forecast cash position for the end of your first month. This figure is now the starting cash position for the next month and the process repeats. Remember, what you’re looking for here is the Cash In day not the invoice issued date and the date you plan to pay an invoice received. Also, if your business is VAT registered then that goes in too as it’s a Cash In occurrence.

So let’s get to it, have fun – happy forecasting!!

Alan J McCafferty
Founder & Chief Executive
Simply Cashflow
- Providers of Cashflow Forecasting Business Management Tools


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