The old business adage that “cash is king” seems more important than ever in this environment of significant economic disruption. While it’s always important to be in a good cash position, it’s more critical to understand the lifeblood of your business in these uncertain times. A 13-week cash forecast will help give you that understanding and put you in a more powerful position to make the most prudent business decisions. The forecast should be updated on a weekly basis, so you always have an informed outlook of the coming months. While a 13-week forecast is common and represents a reasonable time horizon, you can create a cash forecast for a different time period. The number of weeks you include is not as important as having a report that gives you a reasonably accurate picture of the road ahead. To begin you will need to identify expected cash inflows and outflows, as well as your beginning cash balance.Inflows normally include (allocate each of the inflows to the week when you expect the cash to be received): • Cash Sales • Accounts Receivables • Future Sales • Bank Loans • Rental Income • Any Other Source of Cash Outflows normally include: • Payroll • Payroll Taxes • Material and Inventory Purchases • Insurance • Operating Expenses • Note and Lease Payments • Fixed Asset Additions • Accounts Payable Other Significant Expenditures (including quarterly tax estimates and shareholder distributions). Items on the expense side are usually easy to identify and can be pulled from your monthly accounting records. Receivables are often less clear, and thus become the item in the forecast that is most challenging for a business to accurately project. A good approach to get a handle on these numbers is to create three categories.
Once you have projected when your receivable will be paid, you need to add in your projection of cash receipts from future sales. In some businesses, seasonal activity must be considered in the 13-week cash forecast. For example, a construction company may have rising payroll in the spring and the related collection of receivables several weeks later in mid-summer. Forecasting future sales should be done with the guidance of your sales management and then your cash receipt expectations can be applied to those sales forecasts. Why?The more challenging your cash position is, the more valuable this tool becomes. The insights from a 13-week cash forecast will not only help you better manage your business but also will be helpful when you need to communicate with your banker or other outsider. Let’s say you have a significant receipt due in Week 11, but your business will be in a difficult cash position prior to that. This tool gives you the ability to see what you might be able to shift on the schedule (on the receipt side or the expense side) to deal with the shortfalls. It also gives you the ability to proactively communicate your situation so that your creditors know what to expect. You will find proactive communications go a long way in gaining cooperation. Sample 13 Week Cash ForecastIt’s worth taking the time to establish the process. Once it’s set up, it’s just a matter of plugging in the current numbers. The report becomes even more powerful when you compare its estimates with actual inflows and outflows. With that actual data, you can adjust the report assumptions to increase accuracy. If you want a simple cash flow EXCEL model please e-mail Chris De Villers at cdevillers@lauber-partners.com . If you need help creating a cash forecast for your business or assistance with other financial matters, please reach out to us at info@lauber-partners.com. We have a team of experts that can help you immediately.
15 Comments
2/15/2024 07:39:22 pm
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3/13/2024 08:44:33 am
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