Cash is King: Creating a cashflow forecast.

Cash is King.

A phrase you’ve heard many times before, but what does that actually mean to you?

Why Cash Flow is Vital for Your Business

Essentially, without cash, you have no business. You can have hundreds of clients all paying you well, but if you’ve got bills to pay before that money comes in, you’re in trouble. It gets worse when you have more going out than coming in.

It gets worse when you have more going out than coming in.

Cashflow is the biggest killer of businesses. It doesn’t matter if you’re a start-up or a multi million pound corporate. If you don’t manage your cash well, it will eventually come crashing down.

If I asked you to show me your cashflow forecast, could you do it? What about if I asked when the last time you looked at it? Or better yet, updated it?

What is a Cash Flow Forecast?

If you’re sat reading this going what is a cashflow forecast, then simply put it’s a document (usually an excel spreadsheet) that tracks the money coming in and going out, but most importantly, when that will happen.

I know some people who update theirs daily. Others do it weekly, or monthly. It depends on how much things change and what payment terms you agree to/provide. There are some tools for this, but I’ll keep it simple with a spreadsheet for the moment.

As mentioned above, your forecast should be able to tell you when money is coming in and going out. You’re looking for 4  bits of information for every working day:

1. Opening balance
2. Money coming in
3. Money going out
4. Closing balance

Preparing for Potential Cash Flow Issues

When you plot this out for a month, you’re looking for potential tight moments- days where your bank balance is below a certain amount, or if you’ve got a massive amount of outgoings before you get paid the majority of your money. In an ideal situation, you will have enough money in the bank to pay all of your outgoings, regardless of what’s coming in. If you can get enough money to cover a few months, even better.

The reason I say this is things happen. You’re expecting to be paid  within 30 days of sending the invoice, but what if you don’t? If you’re banking on that money to pay someone else, how then will you pay an invoice without it? You can’t. Which has a knock on effect that could serious damage your ability to operate.

The Common Mistake Businesses Make

The biggest mistake I actually see companies make when it comes to cash is doing a forecast, seeing they have enough money to survive for a few months and then forgetting about it. They don’t keep track of the changes or the money coming in because it’s not a big deal.

This is how big businesses fail.

They lose track of what’s going in and out and before they know it, their reserves are gone and any money coming in is going straight out. They hit their overdrafts, take out finance all to try and get back on top of it, but it rarely works.

The Importance of Regularly Updating Your Cash Flow Forecast

This isn’t intended to scare the life out of you, more show you the dangers of not having a good, solid cashflow forecast.

Now, let’s say you do have a solid forecast, what difference would it make?

Let’s say you’re looking at a new project that will cost you £1m. You have the money in the bank so you think let’s go for it.

Then, your CFO who’s helping you comes to you and says our forecast is looking a bit tight right now- too many people aren’t paying us on time. If we tighten our credit control processes, we’ll be good to go ahead. If we don’t, we could be in trouble at the end of the next quarter.

What would you do as the CEO? Press on and spend the million? Or sort the credit control out first, before investing?

Exactly. You’d make sure you were getting money in.

Without the forecast (and a CFO…) you would have thought you could go ahead without realising the dangers that lay ahead.

Conclusion: Turn Data into Actionable Insights

That’s an example of it identifying potential issues, but it could equally have led the CFO to say “forecast is looking good, we’re on for record profits, everyone is paying on time and we’re managing our outgoings well. Now is the best time to do it”.

It’s there to give you the right data, at the right time, and to make sure that there is always enough cash in your business.

Turning what’s on there into actionable data though… that’s a job for me!