This is a big one, and it applies to all industries of all sizes. If you don’t do a regular, frequent cashflow forecast, then you will not be able to see if disaster is on its way, or be able to tell how much excess cash you might have obtainable to pay dividends or invest in acquisitions or value-adding projects.
A good cashflow forecast will be frequent, detailed and accurate. It will probably look ahead weekly for the next two months, then monthly for the following three to four months, or something like that.
It will have appropriate detail inner it. On the confront of the forecast it may say “customer receipts”, but underneath those figures may be the whole list of noticeable invoices, uninvoiced sales and forecast sales. “Supplier payments” should be divided sensibly – for example there may be a few that would be best to be shown separately, like rent payments and health insurance, but the balance can be shown as bi-weekly payment runs.
Quick tip: Be careful of VAT if you are working from your profit and loss account or income statement to produce the forecast. Receipts and payments include VAT, and then you have a separate VAT payment a associate of months later, but in the P&L sales and expenses do not include VAT.
The aim is to highlight when the bank balance becomes a concern. And if it looks as if it dips below zero (or the agreed overdraft limit) in a few weeks time, then you can take decisions now to enhance that. You can look more deeply at customer accounts, or decide to delay some supplier or tax payments for a short period. If you didn’t have a forecast you would only be able to see what you should have done, and not what you should do. Not having a forecast removes all of your options in cash management.
I once worked with a small business that was in difficulties. We went in and produced a revised cashflow forecast that showed the business running out of cash within four months. We updated the forecast on a weekly basis, using an updated aged debtors list for receipts, and using the profit and loss budget for expenses, which were pretty consistent. It allowed us to make decisions on which payments we were going to priorities on a week-by-week basis, depending how quickly our clients were paying us. We knew which clients we were expecting money from and when, so we could chase them up very quickly. Ultimately the clear forecast focused the minds of the board, and gave them a timescale for trying to save the business. And the detail-focus enabled us to keep the business going more than two months longer than we originally expected, and the business was successfully sold as a going concern.
Ask your bookkeeper or accountant to help you give it a try.