For some time now with the advent of cloud accounting systems many products have aimed to help people to better forecast your business cash flow. These products have claimed to connect to cloud accounting software to automatically pull through data and make it easier to forecast. However in my experience none of them are quite up to the job (possibly why Xero recently announced that cash flow forecasting would be a big focus in the coming period).
Let’s analyse a few reasons why a business would have a cash flow forecast in the first place:
- It can show you your Burn Rate (what you’re spending vs bringing in) and your Runway (how many months of cash you have left before running out).
- It aids decision making on whether you require additional finance (before it’s too late).
- It can help you to plan scenario’s such as taking on that extra employee, investing in your office etc.
- It can provide a bigger picture – looking at current or historic data simply isn’t enough, you need to be analysing what’s to come as well.
Unfortunately, very few small businesses have a working cash flow forecast, and therefore are ‘living blind’ in terms of the future. They have usually tried a few solutions but never quite got them working. Here’s a few tips on getting cash flow forecasting right for your business:
Start with a spreadsheet
You don’t have to invest in setting up a new piece of software, linking this to your accounting system and training your team. Start with a simple spreadsheet and make a carbon copy of your bank statement (so Date, Description, Amount & Bank Balance as the columns). Add in what you know in terms of both payments (Direct Debits, Standing Orders, Wages, Confirmed Supplier Payments) and receipts (Confirmed Customer Payments). Then start to forecast both adhoc payments and estimated dates that you expect clients to pay.
Forecast in 90 day chunks
You don’t have to have a daily forecast which lasts for months. The further away you look in time, the less accurate (and therefore less relevant) your forecast will be. For most small businesses, a detailed 90-day forecast is enough to give you a picture of projected cash.
Give your forecast regular focus
This is the main reason forecasting fails in my experience. It will be given an initial focus and then forgotten about. Set 2 diary appointments in the diary on repeat – I’d recommend 2 weekly 30 minute sessions, 1 for the person in charge of forecasting to prepare the forecast, and the 2nd session to review what the forecast is telling you.
Analyse what the forecast is telling you
Over time you’ll get better at interpreting the forecast, refining the weekly meetings and most importantly making decisions on what the data is telling you. Hopefully as you go along you’ll see cash flow performance improving, and you’ll start to feel a little more in control of your finances.
Unsure how to get going? Get in touch on 07866200275 or email me at martyn@agencycfo.co.uk and I can help you get started.
