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The down-low on cash flow projection: What is it, and why your business NEEDS a cash flow forecast

Project Alfred
August 2, 2021

The reality of operating a business is that cash flow projection is critical. So why do so many businesses fail to do cash flow forecasts? We’re on a mission to get more businesses preparing a cash flow forecast, so grab a coffee, get comfortable and let’s talk tracking.

“We have a budget.” 

This is the most common response we hear when we ask if a business has done a cash flow forecast. And we get it. If you haven’t studied accounting or haven’t faced a cash flow crisis before, it might not have occured to you that cash flow is something you can plan and prepare for, just like any other aspect of your finances. 

Something we’re passionate about at Project Alfred is educating people about the value of strategic accounting so that Australian businesses are better positioned to survive and thrive, because everyone knows lots of industries are struggling with cash flow right now. Rest assured, we’re keeping this article simple because honestly, while managing cash flow can be complicated, getting started is actually pretty straightforward. Let’s go!

An empty shopping centre with a cafe with stools on the tables and a man in the background looking like he doesn't know what to do now.
Many businesses don’t think about cash flow until they face a crisis, because they either can’t operate or have a slow period. Cash flow forecasting puts businesses on the front foot.
Cash flow, budget: What’s the difference?

Budgeting: A budget is used to set targets for income and expenses for a certain period of time (let’s say the financial year). These goals should be optimistic but still achievable, because a budget that isn’t realistic serves no purpose (you might as well just make up numbers!). To calculate an accurate budget, do your research: find out your prior year’s expenses and income, and then look at new work or new expenses (maybe a new hire?) for the upcoming year. 

Cash flow forecasting: A cash flow forecast looks at both income and expenses as well as assets and liabilities, so think of it as the next step beyond having a budget. Having an effective cash flow projection tool (this can be as simple as a well-made spreadsheet model, which we can create for you) means that you can effectively look at when your business might run out of cash (because unfortunately, your liabilities don’t go away when your customers do) and then give timing around when you need to bring in more revenue. 

Need help creating a budget?

How can a cash flow forecast help a business? (aka If everything’s going smoothly, do I *really* need a cash flow forecast?) 

Why is cash flow important to a small business? In our experience, a lot of businesses don't look at cash flow apart from checking how much is in their bank account. A lot of profitable businesses don't think they need to look at it and often they don’t need to actually change anything about how they manage their money week-to-week if everything’s going smoothly.

You don't know what you don't know though and if you haven't done a projection, you might not know when cash will run out if you have a bad month, two months, three months (knock on wood). That’s the difference between knowing what your bank account balance is, and the timing of when your business might run out of cash, whether from being unable to trade (snap lockdowns anyone?) or from a seasonal lull in sales that coincides with a huge month in bills and tax obligations. 

While it might feel daunting seeing cash flow projections, the biggest pro of having this information is that you now have some control to plan ahead of time. Trust us, when businesses get blindsided by a cash flow crisis, that is when they go bust (not fear-mongering, this is sadly what happens to profitable businesses every day, and it can happen very fast).

Let’s look on the bright side for a moment though: preparing a cash flow forecast might reveal that you’re in a stronger position than you thought! In that situation, you can stress less about a slow day or two, and even start looking at how you can invest some of your extra resources into your business (all businesses need cash to grow, so if you have it spare, it could be better to spend it than have it sitting in the bank). 

A woman putting through a sale at the register of a cafe with people eating in the background.
When you know your projected cash flow, you have more control over your business’ financials and can plan for potential problems before they happen.
Okay, so tell me how to forecast future cash flow? 

One word: spreadsheets. 

But seriously, you can get started with cash flow forecasting right now if you know your way around Excel or Google Sheets. There are tools you can use, but for most of our clients we like to set up their cash flow model on a cloud based spreadsheet for ultimate flexibility; as cloud-accounting is where you want to be. 

You need to know your income and expenses, and your assets and liabilities (and ideally have historical data from the last year and some idea of how many new clients/customers you’ve acquired since to back up your calculations).

When we’re helping clients set up a cash flow forecast, we discuss everything from how they invoice, timing of income and expenses, and if there is anything specific they want to monitor. Why? Well, when you’re setting up a model, you need to know what assumptions you’re asking the model to use to make predictions. 

And don’t just consider what the payment terms are on your invoice for predicting when you’ll have cash sitting in the bank. Your payment terms might be 14 days, but how many of your clients actually pay on time? The average late invoice is actually paid 23 days late* so if you always have a high percentage of accounts receivable overdue, this can seriously impact your bottom line. 

Good to know: For businesses looking for investors or those that need to model lots of different scenarios, we create highly customised and dare we say, pretty powerful projection models, which can also connect into Xero. If this sounds like what your business needs, give us a call and let us help you assess whether this is the right approach for your situation.

When do you need to have an accountant look at your cash flow projections?

If you have an in-house finance team (or person) that you feel is able to manage and forecast effectively then by all means do that. Let this article serve as a nudge to set up a spreadsheet and start predicting the months when you’ll potentially need to pinch pennies to pay your team and plan ahead.

Here’s three scenarios where you might want to get an expert in to look at your cash flow (but this is a guide not a rule; it is ALWAYS okay to ask for help with any part of your accounting):

1) You’re not confident about setting up an interactive spreadsheet:  In any sort of financial modelling, functionality and ease-of-use is make or break. You don’t want to be copying numbers or doing calculations manually because A) human error and B) the longer it takes the less likely businesses are to maintain their models. 

Alternatively, you may have the resources to manage your cash flow in-house and are already doing so (look at you  👏👏), but it can be worth having a second set of eyes look over the cash flow model to ensure there are no errors or nothing being missed, especially if accounting’s new to you and you’re setting up a cash flow forecast for a new business.

2) Your industry is notorious for cash flow problems: Two that come to mind are construction/small trades and retail. Why? It’s hard for certain industries to do cash flow projections because of payment timeframes (and clients that don’t pay on time) and uneven periods of sales. 

We can help with strategies to allow for quicker payment (e.g. setting up easier payment methods), collecting overdue payments (one of the hardest parts of running a business), and cutting out unnecessary expenses and building up cash buffers ready for slow sales periods).

If your business operates a service model in a service industry (lawyers, consultants), consider whether you can implement a fixed regular fee rather than invoicing at the completion of a task. This is a win-win for the cash flow for both your business and your clients.

Two men wearing hi-viz and hard hats installing solar panels.
Cash flow forecasting is particularly important for businesses that are vulnerable to cash flow problems, such as trades and retail.

3) Your business is facing a cash flow crisis: We strive to empower and educate our clients to be able to manage their own cash flow, and we wouldn’t take control of cash flow unless we felt it was logical to do so, but if your business is unable to meet its liabilities and you need an accountant to help you get things back on track, let’s talk (sooner rather than later). You can also check out our practical tips to manage your cash flow.

Don’t let cash flow worries turn into cash flow woes

One thing we tell all our clients is that understanding their cash flow forecast is just as important as the model itself, and the best way to understand your business’ cash flow is to start forecasting. Get a spreadsheet set up and start plugging in as much information as you can: knowledge is power. Having a healthy level of worry about cash flow is actually a really good thing, but let’s channel that energy into action.

Book a free discovery call with our expert team to find out more about our cash flow forecasting services.

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