Getting to grips with cash flow forecasting

“Never take your eyes off the cash flow because it’s the lifeblood of business”

Richard Branson

Although on the face of it the most blindingly obvious statement to make, understanding your cash flow is critical to managing growth and scaling your business.

You need more than a great idea and a great team to scale your business. You need to understand your cash flow and how this will impact decision making around spending, investment, and development of technology and infrastructure.

Managing your cash is future-proofing your business!

Life blood

Cash flow is simply the movement of money in and out: the blood that courses through the veins of your business.

Human and corporate bodies are very similar in this regard, and both require the flow to be perfectly regulated if they are to function to their full capacity.

Checking your cash flow is like checking your pulse: a vital sign of a successful business.

What is cash flow forecasting?

Cash flow forecasts are future projections of money in and out, providing deeper insights into the financial health of your business. A business horoscope based upon facts!

There are 2 types of forecasting and you need both to scale your business and manage the peaks and troughs of cash flow.

Short-range Forecasting

Short-range forecasts typically cover a 13-week period and they are updated on a rolling basis. This is where you track the nitty-gritty of your cash flow with expected receipts from sales and funding and your planned payments for staff costs, suppliers and operating costs.

A lot of magic can happen here!

By flexing payments and bringing forward receipts you can navigate your way out of temporary negative cash flow. Your short-range forecast should help you define and manage the actions you need to take to manage your cash.

Your short-range cash flow is the cash landscape that is immediately ahead of you. It is critical to have confidence in your numbers and key to this is making sure the data is current and the forecast is updated on a regular basis.

Often, short-range cash flow is tracked manually using a spreadsheet. The problem with this approach is that it can be labour-intensive, and it is prone to human error. If you adopt a spreadsheet approach, make sure the tracker is fit-for-purpose, your formulae are robust, and you minimise data entry to key inputs.

New cloud-based apps can link to your finance system to build your short-range forecast. These apps take the heavy lifting out of regular cash flow updates and can give you close to real-time forecasting information. The downside is the time investment required to set-up properly and you need to take care when reviewing the data. It’s advisable to apply a common-sense test to the outputs from automated systems: never assume the data is 100% correct.

Long-term forecasts

Long-term forecasts (or financial model) are the strategic direction of the company, setting out the financial expectations anything up to the next 5 years. These are incredibly helpful when planning your business, identifying future cash pinch-points and assessing what level of funding you require.

It’s important for all businesses to plan ahead, especially when you are looking to scale-up. A financial model helps you navigate your future growth and gives you actionable insights for the medium and longer -term.

There are Cloud-based forecasting tools on the market but mostly these expect you to have an in-depth knowledge of accounting and finance. Whilst they bring a degree of automation to your forecasting, they are often no substitute for the flexibility of spreadsheets, especially when you need to model revenue forecasts and bring in data from external systems.

It is best to talk it over with your accountant to make sure that you have the best solution for building your long-term forecasts. You will want to make sure that the forecast design and layout is suitable for the users: a financial model built for business planning is unlikely to work for investors when you are approaching a funding round.

Know your numbers

You need to know your numbers before you can fully understand your cash flow and you can only do this when your finance systems are up to date and reliable.

The quality of your underlying financial system and accounting records are the foundation of building short-term and long-term forecasts. Your forecasts won’t be credible if your management accounts don’t stack up. Get your finance systems up-to-date and keep them in good shape.

When forecasting you will need to make assumptions around the key numbers: timing and value of sales, cash collection from customers, operating costs and supplier payment terms. Getting under the skin of your assumptions and getting these as close to reality is vital. Where you have limited historical data, it’s sensible to test your assumptions on a regular basis and update your forecasts.

The team at FinFlare are always happy to help you build best-in-class finance systems and prepare short and long term forecasts.