Working Capital

How to Forecast Cash Flow and Reduce Uncertainty

March 5, 2021
The C2FO Team

Accurately forecasting your company’s cash flow requires a bit of work. But having a better handle on cash can help you purchase, plan and invest over time.

Jack Welch, the legendary CEO for General Electric, may have said it best: “If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction and cash flow.”

Welch, who led GE from 1981 until 2001, knew a thing or two about all three. Under his leadership, GE’s market cap grew from $12B to more than $400B and achieved its highest-ever stock price.

Accurately forecasting cash flow can be a valuable asset for any business owner or executive. In the short term, it can reduce worry and sleepless nights about paying upcoming expenses, providing services or acquiring goods for sale. Longer term, a reliable cash flow forecast can be highly valuable to a prospective business buyer.

Cash flow forecasting predicts cash inflows and outflows over a prescribed period of days, weeks, months or quarters.

Fortunately, the necessary tools are likely at your fingertips — namely data, systems and history. Especially helpful is a willingness to be honest with yourself about the commitments you’ve made — and the expectations you have — for your business. 

Where to begin your cash flow forecast

Start by gathering recent bank or profit and loss statements with the essential information, even if much of it is all too familiar. If you have a pile of unpaid bills nearby, those can also help.

You’ll also need an online system or tool. Here are a few options: 

  • Quicken
  • QuickBooks
  •  A “white-label” or industry-specific software
  •  An online calculator
  • Microsoft Excel or another spreadsheet program

Before proceeding blindly, remember that the goal is to create an upcoming revenue and expense schedule to help you meet obligations and plan for the months ahead. Your cash flow forecast should be flexible, allowing for daily, weekly or monthly updates as often as new expenses, sales or deposit information is available. 

Many systems provide a “digital checkbook” format where expenses and revenues can be entered to render an ongoing balance, often referred to as the “cash position.” In Excel, you can use columns to record revenue and expense items, and rows for days, weeks or months. Note that Excel requires manual entry and management of formulas, whereas other systems do this automatically.

The real work of forecasting cash

You likely know that expenses are nearly always more predictable than sales or collections.

With data in hand, start building your forecast by entering mandatory and recurring expenses like rent, payroll, benefits, utilities and loans for the current month or future months. Then, enter periodic and/or variable expenses such as inventory purchases, supplies, insurance premiums and tax estimates, to name a few.

Next comes the cold-sweat, tricky part: scheduling anticipated revenues or collections.

Enter known deposits, prepayments or anticipated subscription revenue, as applicable. Include point-of-sale revenue for any expected retail sales.

Consider these historical methods or data points to calculate or capture other anticipated revenue:

  • Average monthly collections
  • Collections as a percentage of all receivables
  • Collections as a percentage of aging – 1-30, 31-60 or 61-90 days
  • Days Sales Outstanding (DSO), which indicates the number of days needed to convert sales to cash

Allocate these items into your forecast by day, week or month, and then adjust as collections occur or bills are paid.

Who will get all of this done?

Now, you may be saying, “Wonderful. But who has time to do this?” Well, if not you, consider these options:

  • Your CFO or lead financial person — someone who typically provides forward-looking guidance
  •  An external accountant or tax preparer familiar with your books
  •  A fractional CFO, one for-hire or a business advisory firm that routinely provides this service

No matter who does the work, here are some additional questions to consider:

  • Does your business enjoy point-of-sale collections, or is it open-account with discount or Net 10, 30 or 60-day terms?
  • What portion of the business comes from recurring revenues like scheduled service contracts or subscriptions with their reliable payment streams?
  • How do your best customers pay? Is it the same day every month? Are they quick, prompt or late — and by how many days?
  • What forms of financing does your company use to generate more cash flow and how often do you use them?
  • How seasonal is your business? For example, do you sell to government customers who may spend disproportionately more at the end of a fiscal year?
  • Is the business prone to known or surprise events that can skew activity and create intense or sudden cash demands? 
  • Is there a known sell-through cycle that stretches from inventory acquisition through collections?

The payoff

For many business owners, the more unpredictable the business climate, the stronger the need for certainty. Only by maintaining a regularly updated forecast of expenses and revenue will you have a grip on your company’s cash flow, better preparing you to purchase, plan and invest appropriately over time.

With a quality cash flow forecast in hand, you just might find yourself worrying less about your business — and sleeping more. 

To learn how C2FO can help you take control of your cash flow, visit https://www.c2fo.com/amer/us/en-us/for-vendors

 

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