If you needed persuading about the importance of cash flow forecasting when I wrote my blog Cash Flow: How to avoid the rapids, it’s unlikely that you will need your arm twisting now.
Events over the last few months have brought cash flow into sharp focus as the most important thing to have a handle on to keep your business afloat during this challenging time.
Let’s start with a recap…
What is a cashflow forecast?
To put it simply, it is looking ahead to work out how much cash your business will have at intervals in the future, usually monthly, taking account of anything you will pay out and (hopefully) any cash due in.
Why do I need it?
At times like these, you need to know if you can pay your bills. Cashflow will help you understand if you need to have conversations to reduce services with suppliers for a period of time or perhaps a payment holiday. The reality is that many businesses are quickly running out of cash and you need to know when it might fall to zero and how far below zero it might get.
Armed with cashflow information and the amount you think you need to borrow, you can approach lenders for help. Also, some banks require a 12-18 month cash flow forecast for loan applications.
Basically, it’s a must-have.
Where do I prepare it?
How do I do it?
If you want to have a go yourself, here is a simple guide to creating a cashflow. If you are using a spreadsheet (we’d not normally recommend spreadsheets but sometimes needs must), set it up with the months along the top and different categories of cash in and cash out down the side.
Start with the money you have in the bank now at the top
Add in cash that is due to come in, in the month it is due. This includes:
- Invoices that your customers haven’t paid yet
- Cash coming in from new work you are doing
- Cash which will come in from new work you expect to do in the future
- May be other things like Grant, Loan, Shareholder investments
Take away cash that is due to go out, in the month it is due. This includes:
- Money you need to pay suppliers
- Payments for raw materials or stock for new work
- Rent and rates
- Salaries for yourself and your staff
- Telephone and internet bills
- Marketing and advertising
- Tax payments, both VAT and Corporation Tax
When you add up 1. 2. and 3. you have your new expected cash amount calculated for the end of that period and that becomes your new starting point for the following month!
That’s all ok, but I seem to have misplaced my crystal ball….
Cashflow in the next month or so, under normal circumstances, is usually fairly reliable to forecast. With a bit of help from Invoices Awaiting Payment (cash in) and Bills to Pay (cash out) in Xero you should be able to have a good idea of cash movements to apply to your starting position of cash in the bank.
Some of these cashflows will be variable which means they increase and decrease with sales and need more thought. Others will be fixed, such as mobile phone costs and staff wages, which need paying anyway.
As you start to look further ahead than this, things start to get tricky. And then throw in a lockdown and well, where on earth do you start?
Having worked with clients on their cashflow over the last month, I would recommend thinking about the situation in 3 blocks:
1. What could happen in the next 3 months?
It may be that your business will be very quiet and even when things ‘reopen’, the public may be cautious in spending their money.
2. What could recovery look like and over what period of time might that happen?
Growth back to recognisable levels may take time. You could model this as percentages of previous year’s sales perhaps, particularly if there is seasonality to your sales. Or estimate the number of projects you may get using an average size and grow this.
3. When could my business get back to a steady-state and might there be an economic downturn to factor in?
The economy looks set for a period of recession, so your steady-state should reflect this, at least over the next 12 to 18 months.
Let’s be clear, anyone with half an eye on the news knows there is a healthy amount of guesswork involved, particularly when you get to a year or more out, but it will give you a mechanism to think about the worst-case and prepare you, both financially and mentally, for what might be ahead.
We have supported clients through the whole process of building their cash flow and providing ongoing help with how to get the best out of the information. To find out how we can help, get in touch.
Who are we?
We are Xero Accountants and business advisors, currently with an empty office in Epsom, Surrey, and very active Zoom accounts, who work with agency clients all over the UK as their finance team.