How to keep your cash flow forecast up to date

A cash flow forecast gives business owners a clear picture of how much money will be moving in and out of the business over time. Maintaining it is important for survival, but can open up doors to new opportunities too.
Maintaining a cash flow forecast

Cash flow forecasting is a key stage of business planning. Your forecast will impact your wider company strategy and play a role in deciding what you move forward with next.

Forecasts tend to cover six or 12-month periods and are updated on a rolling basis (for the purposes of this article, annual cash flow plans will fall under a separate budgeting process).

This article will explain how to develop a routine for updating your cash flow forecast and what to do when things go wrong.

At the end of this article we've also curated a list of other pieces of content you might find interesting and useful.

Why cash flow forecasts are important

When it comes to long-term planning, you might have a company vision and values which inform this process. Any plans you make will include budgets and the company’s strategy for achieving its goals. It’s when you go to implement the tactics in your strategy that you will start to update your cash flow forecast.

The calculations may be done as part of a profit and loss forecast or created within your cash flow report. Either way, the routine of maintaining your forecast and learning from the process is similar.

Look at the amount of runway you have

How long will it take for your company to run out of money? If you sold nothing else, could your business survive for two months, four months, a year?

Businesses funding growth through profits have to balance how much cash they invest with the working capital needed and the ability to absorb shocks. Invest more and your runway shortens, but growth will hopefully accelerate. Shorten your runway too much and a bad debt or unforeseen emergency could cause the business to fail.

The share of profit you keep in the business to invest in growth is based on the management team’s philosophy and objectives. Consider these scenarios:

  • If you plan to sell the business in the next few years, it’s likely you’ll focus on short-term profitability to maximise the sale value
  • Venture capital-backed businesses may focus on long-term value creation and be prepared to make a loss for a number of years
  • Businesses in sectors like retail and hospitality need new locations to be profitable quickly to sustain high operating costs
  • You may run a business to provide earnings and create a great lifestyle. If you have no interest in selling it, you’ll focus instead on month-to-month profitability

Formula Botanica founder Lorraine Dallmeier chose to grow her online skincare school organically. It’s achieved year-on-year growth of between 75 per cent and 220 per cent since 2014. Last year, it reached a turnover of £1.2m.

The approach means Lorraine doesn’t have to answer to shareholders or banks. Instead, she concentrates on balancing her lifestyle and what she wants the business to achieve.

It’s common for shareholders to regularly take money out of companies through dividends, particularly in founder-owned businesses. Think about the share of profits you want to withdraw and how this impacts the cash available to fund growth.

Lorraine Dallmeier

Lorraine Dallmeier chose to grow her online skincare school organically

“It's been a long, hard slog. I took on the business when it was in its infancy with 200 to 300 students. Now we have 1,000 to 1,500 people a year taking courses in 133 countries and I have 15-20 full-time staff members.”

Lorraine Dallmeier, founder of Formula Botanica

Scenario planning in cash flow forecasts

Scenario planning is the process of testing how different strategies and performance impact your cash flow. It will help you understand opportunities for growth and potential cash flow problems.

Create your cash flow forecast in a way that allows you to switch between sales forecasts and alter the assumptions for key costs. This may mean creating duplicates of the main tab of your spreadsheet or you can use Excel’s Scenarios tools to switch between assumptions.

Sales forecasts can include a number of scenarios, including a base and best case scenarios:

  • Base case forecast: What happens to your cash flow projections if sales are at the minimum level of your estimates? For service businesses, this might only include work that’s booked and contracted. B2C companies might just include a conservative estimate of sales
  • Best case forecast: You achieve your goal or stretch goal; it’s been a great year!

Scenario planning is useful for examining the impact of your strategy or changes in the business, such as:

  • Expanding into a new territory
  • Hiring a number of new employees
  • Making capital investments
  • Changes in pricing
Black + Blum products
Case Study.

How doing one thing well helped Black+Blum double revenue in two years

Identifying KPIs

While cash flow forecasting happens after budgets have been established, the process identifies opportunities for growth and ways to make the business more productive. Monitoring KPIs and creating assumptions about the impact of investment will help you learn about the company’s performance.

For example, you might forecast the cash flow impact of hiring four new salespeople, including the salary costs and revenue generated. Noticing the impact of reducing the time it takes salespeople to become effective could lead to a new onboarding process.

  • An ecommerce business could improve cost per acquisition
  • Restaurants might look at incentives that increase spend per customer
  • Service business could make revenue per salesperson a KPI

Redesign your offering to free up cash

Products and services can be redesigned to improve cash flow and free up capital to invest in the business. Consider how your offering can evolve:

  • Renegotiate payment terms with customers and suppliers
  • Move customers on to Direct Debits
  • Supplement your offering with products that customers pay for in advance, such as customised items

Building a routine to maintain cash flow forecasts

It’s important to build a routine for maintaining a cash flow forecast. Updating your forecast regularly will give you the chance to identify opportunities and threats.

Get into the habit of updating your cash flow when making financial decisions, such as changing the terms on a lease. Make sure your finance department is providing the most up-to-date data.

It’s essential the management team examines the cashflow forecast regularly. How often you work through this process will depend on the complexity of your business. It could be daily, weekly or monthly.

Build a reporting procedure, so you are aware of what’s happening. This could include:

  • A daily or weekly email outlining a small number of key facts such as sales, the bank balance and aged debtors
  • A short, regular meeting with a key finance person to keep abreast of trends, issues and opportunities
  • Regular meetings to go over your management accounts, which are normally produced on a monthly or quarterly basis and discussed in depth

Plan your finances during periods of growth

Five steps to better financial planning

Financial prudence

The cash flow forecasting process provides an opportunity to examine and reduce costs. It’s impractical to examine every expense when looking at a forecast, but getting into a routine of analysing the key areas can help.

Points to consider when forecasting outgoings and trying to free up cash flow include:

  • Can any large fixed costs such as office space be renegotiated?
  • Suppliers may reduce costs when certain order levels are reached
  • How can you reduce the length of time between paying for goods and getting paid?

While it’s important to manage costs, employees need to have the right tools and environment to be productive. Simply looking to cut costs may decrease the company’s long-term value and ability to achieve its goals.

Adapt to change

Shocks like an economic downturn, the loss of a large customer or legal problems will cause business leaders to examine their cash flow. Reactive forecasting is important to surviving unusual business circumstances.

It's something Snaffling Pig CEO Nick Coleman spends a lot of time thinking about. Nick now takes a highly conservative approach to forecasting payment terms, doubling how long the customer says it will take to pay. Listen to Be the Business’s podcast with Nick here.

The following steps can help improve your cash flow position if your company is becoming distressed:

  1. Create new forecast scenarios that take into account the changing circumstances
  2. Model the impact of different reactions to the crisis, such as making staff redundant or cutting your marketing budgets
  3. Talk to your financiers as soon as possible. Banks may be willing to provide payment holidays or investors a loan, but you need to keep them up to date. Sharing your forecast models and assumptions will help reassure your partners
  4. If the problem isn’t systemic, you can consider short-term finance such as invoice factoring and overdrafts
Nick Coleman, Snaffling Pig

Nick Coleman has learnt to take a conservative approach when it comes to payment terms

“Cash flow is always the thing that keeps me up at night. There’s been probably three occasions in Snaffling Pig history, so pretty much one a year, where we thought: ‘this is it, cash flow is going to take us under’.”

Nick Coleman, CEO of Snaffling Pig

What to do next?

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