Cash flow is essential. Without cash, your business ceases to function and exist. With that being the case, how do you manage and prioritise cash flow? The starting point I always recommend is creating a 13-week cash flow forecast.
This document does not need to be elaborate or sophisticated – a simple spreadsheet will do. But it can be absolutely game changing. It is incredible how often the conversation changes with a client after they have created an accurate cash flow forecast for the first time. The conversation goes from “how can I grow my business with clever marketing techniques?” to “help, I am going to run out of cash and need to do something about it – quickly!”
The top half of your spreadsheet should have the opening cash balance in your bank and then add on all the expected income for that day or week (I will explain if you should do daily or weekly cash flow forecasting in a moment). Then you need to subtract from this total all the cash that is going to leave your business that day or week. The closing balance that day becomes the opening balance the following day.
The opening balance on your forecast should always be the same as your bank balance. If they are not the same then something has been missed. Has a customer not paid on time? Or have you delayed payment to a supplier for some reason? The most likely thing that happens when you start doing this is that it does not reconcile with your bank balance because you have forgotten to add in expenses you had overlooked. That software subscription you signed up to ages ago, don’t use and forgot to cancel. Or the maintenance contract for the photocopier you replaced six months ago.
So doing a cash flow forecast and monitoring it can throw light on costs you have forgotten about, that can be eliminated and the savings drop straight to the bottom line. So it is a doubly useful tool and the little time it takes to set-up and update is normally rewarded straight away in the form of savings on unnecessary expenses.
Daily Vs Weekly
I always suggest that given the minimal time and effort required then daily is the best option. If nothing else it will help you understand the cash flow rhythms within your business. If cash flow is very tight then daily is the only way to go as getting a payment in on time or working with a supplier to get a payment extension could be critical and one day could make all the difference. However, if your income and expenditure is very predictable then doing a weekly, rather than daily update is fine but there is an element of risk in doing that.
The ultimate reason for doing the cash flow forecast is so that you can see three months ahead what the closing balance is going to be each week. If the closing balance is a negative figure or if the negative figure is larger that your available overdraft then it acts as an early warning system that you need to do something in the next 13 weeks to resolve the situation such as delaying payment to a supplier, getting some cash in sooner or talking to your lender about an overdraft extension. A request for a loan or extra time to pay a supplier is usually well received if you make the request ahead of time, can demonstrate why you need the breathing space (in the form of your forecast) and can be very specific about how long you need the extra overdraft headroom or how soon you will make full payment. The fact that you have the detailed information to hand gives the other party confidence to work with you. Just as long as you deliver on the promises made.
The cash flow forecast should always be a live, rolling document. Every week you will be adding an extra seven days on the end of your spreadsheet so you can constantly see 13 weeks ahead. When you build your annual budget (you do one of those right? Or do I need to do a follow-up blog on those – let me know in the comments section below) you can do an annual cash flow. It is unlikely to be accurate for the whole year but it will indicate if you are likely to have enough cash to fund your stellar growth plans or if you need to scale back your ideas or find extra cash to support the expansion.
One final point is to keep the document realistic. If you have 30-day payment terms with a customer but they always pay around the 45-day mark then you need to put the income down as due to come in after 45 days. Do not let that practical and sensible approach put you off chasing. You should chase slow payers relentlessly as if you let them have 45 days without too much hassle they will soon be paying you on unofficial 60-day terms. From a cash flow perspective, you need to calculate when the cash is likely to hit your bank or your forecast will be out which could be catastrophic. If in doubt err on the side of caution. If cash comes in sooner than planned then you will be in a much stronger position but you could be in big trouble if you underestimate the time it will take to get paid and hit a cash flow crisis.