It’s merry when money goes round

Posted on 3 Mar 2011 by The Manufacturer

Small business blogger Steve Grice reveals a few tips for cash flow forecasting for an existing business

With the help of Excel, most business owners should be able to construct a working weekly cashflow forecast without input from the accountant. To help you focus on what cash your business needs, I’d always recommend keeping a rolling 13 week cashflow forecast. This will give you at least 3 months notice of any problems. For manufacturers this is crucial because of the length of time of the sales and build cycle – this time represents cash tied up in working capital.

A rolling cashflow forecast means you’re going to be updating your cash position at least once a week. Keeping a close eye on your cash position means that you will have the opportunity to sort out any issues in good time. A unexpected crisis position with your cashflow is a sign of poor management.

Overheads should be relatively easy to predict over a three-month time frame. You will know the cost of rent, rates, insurance etc. For most businesses, staff wages are also pretty fixed over this kind of timescale too. A quick tip for capturing all your regular fixed costs is to look back over your bank statements for the last three months. You will also know from your incoming invoices or purchase orders who you owe money to and when it needs to be paid.

Predicting Sales

Predicting overheads is relatively easy for an existing business. Predicting sales can be less so, although it is easier over a shorter period.

If you’re a manufacturer, you’ll have a bunch of live quotations out with customers at any one time. You should be able to predict reasonably accurately from past experience what proportion of these will turn into firm orders. You should certainly known the length of your manufacturing cycle, and what terms you’re selling on. From these pieces of information, you can predict when you’ll be receiving the cash.

For wholesalers or retailers, that sell on a more immediate basis, you need to look back at your historical data at sales in the relevant week last year, and adjust by what you know about major customers, or whatever else is happening in your market now.

Keeping it maintained

Every week you should set aside time in your diary to update the cashflow forecast. Add another week onto the end of it and modify any numbers that you know have changed in the past week – for example, if one of your customers has told you that payment will be delayed for another month. Alter the numbers and have a look at the difference this makes to your cashflow over the coming weeks.

Flexing and Modelling

You can also use your rolling cashflow to answer ‘what if?’ questions. For example, what would happen if I got an unexpected large order, or my key supplier suddenly wanted payment on delivery rather than allowing 30 days credit. You can also model the impact if you changed your payment terms e.g. if you wanted to take less of a deposit upfront.

By getting into the discipline of updating your cashflow each week, you will have a much better grasp on how your business works, and which operational areas drain cash from the business. Targeting these areas will help liquidity and solvency of your business and allow you to sleep better at night.

Steve Grice is a Business Development Manager for the Black Country Reinvestment Society – a non-profit lender to SMEs. His views are entirely his own and are not necessarily representative of his company.