Forecasting cashflow

Cash is the lifeblood of any business. Businesses fail because they run out of cash and managing cashflow is every Senior Manager’s responsibility.

Well managed businesses know their cash position and plan ahead. A detailed rolling 13 week cash flow that is regularly reviewed and updated by the Senior Managers will ensure the business knows what challenges lie ahead.

The level of detail required often depends on the situation. I like to see a clear breakdown of the major elements of trading inflow (debtors) and outflow (creditors) broken down to show the major flows expected by each key category, for example: customer, supplier, employee wages/salaries, pension/employment benefits, HMRC payroll, HMRC VAT, expenses, Bank charges/interest, utilities and facility (lease).

Non-recurring items such as client tooling or contract specific client funded spend and capital expenditure should also be shown as separate line items with appropriate levels of detail.

The opening cash balance plus the expected weekly inflows less the expected weekly outflows will then show the forecast closing weekly cash position.

Owners and Managers should consider the cash headroom required to prudently manage the business.

If the business has an invoice discount facility, the weekly maximum available drawdown can be shown. When this is “added” to the weekly closing cash position the headroom available to run the business becomes clear.

A further refinement is to colour code the headroom. Any negative sum can be shown as “red”. Cash balances above the agreed headroom limit can be shown as “green”. And the cash balances between the headroom limit and zero, as “amber”.

If the business already produces and regularly reviews a rolling cashflow, Owners and Managers know how useful this discipline can be. If however your business does not routinely forecast cashflow, consider how much better your business could perform if it had a better view of its cash position.