The business world has been turned upside down!  Who would have thought everything would abruptly stop and nearly all business would be disrupted by an unprecedented pandemic?  We are now working from home and conducting business on-line with as minimal human contact as possible.  Yet business must go on if we are to survive and then thrive!  In times of crisis, no matter the cause, there is one thing that keeps the doors open, employees working, and business growing – cash!  Unfortunately, for many businesses, forecasting cash flow has not been a priority And if they are doing it, it is likely in cumbersome excel workbooks.  So, how do you get insight to your cash flow quickly and with clarity for 13, and better yet, 26 weeks out? 

WATCH THE VIDEO: CASH FLOW INSIGHT IS CRITICAL

Cash Coming In 

Simply stated, for a business, cash inputs include Customer Accounts Receivables and what dollars are anticipated in for products sold and/or services rendered.  To make your forecast meaningful, it is best to know this level of detail for at least the 20% of your customers that drive 80% of your revenue.  With that information you would be able to change your Days Sales Outstanding at a customer level or model impacts of a slow down in new purchases.  Of course, you would also be able to model incoming cash from the Government Stimulus bill or other short-term bridge loans to keep your business going.   

Cash Going Out 

On the other side, you have cash going out.  Again, keeping it simple, you need to be able to manage your payments.  First, identify bills that “keep the lights on” like payroll, rent, utilities and loan payments.  In addition, review your Vendor Accounts Payable and the 20% of your vendors that account for 80% of outgoing cash.  With this data, you can manage your payments on a daily or weekly basis in order to maintain an acceptable cash balance. 

Simplicity is Key 

The primary requirement to your first cash flow model is – keep it simple! If you consider that a cash forecast is nothing more than identifying all your cash in, less all your cash out, it should be easy to do, right?  For the most part that is correct, but what do I mean by simple?   

First, keep in mind that while business is not simple, your company’s cash flow is nothing more complex than your own personal checking account.  Here is an example of a simple cash flow model: 

cash forecasting

To make this work, you need to know what your starting cash balancetypically a summary of the company’s bank balances less any outstanding checks or payments.   

Next, know what Cash you have coming in by week, as well as, projected out 13 and/or 26 weeks.  That looks like this: 

Cash Forecasting

As you can see, your customer accounts receivable is the primary source of cash inflow. If you can bring the details into your model you can forecast and adjust at the customer level.  Managing your inflows at this level of detail allows you to greatly increase the forecast accuracy and can help drive decisions on a customer by customer basis.  

Cash Flow Model 

To complete your simple cash flow model, let’s address cash going out each week.  That could look like this: 

cash forecasting

When modeling cash going out, keep in mind that there are two classes of payments to consider:  

  1. What payments must be made to keep the company going?  Highlighted above in in yellow are those accounts that need to be paid in order to keep the company working.  Payroll, rent, loans, etc. 
  1. What vendors must be paid?   Highlighted above in light green are the Customer Accounts Payable.  Bringing in this data at the vendor level detail by week or month, you can determine which bills are the most “critical” to be paid.  Critical could relate to a strategic relationship, key raw material, or most overdue.  Modeling at the vendor level allows you to make better decision as you manage your on-going cash balance. 

Forecasting Cash is Critical 

In summary, forecasting your cash is critical, especially in times of uncertainty, and it is best to keep it simple.  Deploying a modeling solution that is easily managed, allowing you to use this information to make key decisions, is incredibly powerful!  

As this recent pandemic has shown us, now is the time You can have a cash forecasting model like this up and running in weeks, it doesn’t take months.  eCapital Advisors can help you create a cash flow model for your business, whether that is in your existing budgeting and planning software or implementing new software. Contact us today. 

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