How do you build a cashflow forecast?
Building a cash flow forecast can help businesses plan their cash needs and ensure they have enough liquidity to cover their expenses.
Building a cash flow forecast can help businesses plan their cash needs and ensure they have enough liquidity to cover their expenses.
Here are the steps to build a cash flow forecast:
1. Determine the time frame: Decide on the period you want to forecast (typically a week, month, or quarter).
2. List all sources of cash: Start by listing all the sources of cash for your business, including sales revenue, loans, and investments.
3. List all cash outflows: Next, list all the cash outflows for your business, including salaries, rent, inventory, and other expenses.
4. Estimate the timing of cash flows: Estimate when the cash inflows and outflows will occur during the forecast period. For example, you may receive payment from a customer in 30 days or pay rent every month.
5. Calculate the net cash flow: Subtract the cash outflows from the cash inflows to determine the net cash flow for each period.
6. Adjust for changes: Review the forecast and make adjustments for any changes that may affect cash flow, such as new sales contracts, changes in expenses, or changes in borrowing.
7. Monitor actual cash flow: Compare the actual cash flow with the forecast regularly to identify any discrepancies and adjust the forecast as necessary. Cash can come from a variety of sources, such as sales revenue, loans, investments, or other income.
By building a cash flow forecast, businesses can better plan their cash needs and ensure they have enough liquidity to cover their expenses.
It can also help businesses identify potential cash shortfalls and take proactive steps to address them before they become a problem.
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The CFO role has many dimensions
The CFO role has never been so important. Companies are navigating uncertain territory and having a strong CFO that can manage the nuts and bolts of finance and help navigate the commercial as well is instrumental to how companies navigate this period.
The CFO role has never been so important. Companies are navigating uncertain territory and having a strong CFO that can manage the nuts and bolts of finance and help navigate the commercial as well is instrumental to how companies navigate this period.
The CFO is expected to know the numbers, manage the numbers and be proactive across the key financial metrics that can impact the ability of the business to do what it needs to do. The CFO needs to have the strength to battle the business when necessary, when the financial performance is below the budget/forecast view.
The CFO is also expected to be the strategist, working with the business to understanding/build and execute on the strategy. The budget and 3-5 year plan needs sufficient investment for the businesss to deliver on the longer term plan.
You can’t forget cash, cash is instrumental to ensure the business can operate, if you have a profit but don’t have operating cashflow, you get yourself into challenges. When COVID landed, many businesses that had not actively managed cash, needed to start, however there are businesses out there that don’t actively manage their cashflow, and this is a mistake.
You need to understand your timing of receipts, timing of payments, working capital requirements (inventory etc.) and understand how this interacts with your budget and forecast.
A 13-week cashflow forecast, is a must and allows you to look at your CF weekly against the budget and then roll another 13 weeks to understand the ins/outs of each cash. Once you understand cash, you can start to actively manage cash. Cash is king and in the current environment even more important than ever.
The CFO leads a finance team, sometimes owns other functions, works closely with the CEO and Executive Leadership team, and is actively involved with the Board, Shareholders and other key stakeholders.
The CFO also takes a leadership role with other projects, business unit to demonstrate the importance of Finance in supporting the other business units. Your shareholders will determine what kind of CFO you become…as in a private equity environment it’s quite different too, private ownership or founder lead company. Whatever the case, the role is varied, hard, challenging and rewarding.
If you are a CFO and looking for some tools, templates and relevant articles, see below Whiteark has some great tools for you to use in your role and with your teams. Jo Hands, Founder/Director of Whiteark has walked in your shoes and has some great experience with related topics and has some practical tools and templates you can use.
Check our CFO guide HERE .
Explore our thought leadership articles about Finance and CFO’s HERE
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Budgeting & Forecasting - it's not as easy as it used to be
The concept of budget and forecast was simple ….
Using prior year information and overlaying assumptions, historical changes, investments etc to deliver a new set up numbers for the upcoming year or years. Shareholders wanted to see an improvement and so as long as the percentage changes were going the right way then you were normally ok.
The concept of budget and forecast was simple ….
Using prior year information and overlaying assumptions, historical changes, investments etc to deliver a new set up numbers for the upcoming year or years. Shareholders wanted to see an improvement and so as long as the percentage changes were going the right way then you were normally ok.
Historical trends in all key metrics was the starting position to build the budget and forecasts and then work out what metrics you can improve, how you can improve and the timing to overlay into the budget/forecast.
Companies can take 3-6 months to prepare a budget, it’s a ridiculous amount of time, and time that should be spent executing the plan and driving a positive outcome rather than validating an excel model.
A budget should be driven from key metrics i.e. customer numbers, average revenue per customers, new customers, customer churn rate etc. Understanding what a customer generates and then costs, can ensure that the model is underlying based on key metrics. This means when you are measuring performance against the budget, you can understand why you are travelling higher or lower.
AND THEN THERE WAS COVID…
Covid landed in 2020 and developing budgets, forecasts and understanding the impact was hard if not impossible. Many businesses tried to do a forecast of where the year was going to land for FY20. The budget was useless and metrics and information that didn’t mattered, now mattered.
Companies were focused on building a forecast. CFO and finance professionals developing a forecast for an uncertain period, where history has little relevance and the future is new and therefor every uncertain. The best way to manage this would be to do scenarios that allow you a high and low scenarios and you know what the impact if each of these different book-ends happen.
Most of the forecast were wrong, as there were guesses but got the company through this uncertain period.
We are now in a getting back to normal period, post COVID (even though COVID still around) and this period is tricky…people were buying products online and now going back into stores, so the revenue from online will drop, back to pre-COVID probably not but what will be the level, how will this impact inventory levels, cashflow requirements and how the business operates.
Budgeting and forecasting has never been so difficult. Having clear business drivers and some scenarios to stress test, cash, debt and other key operating metrics and having a plan B if something occurs that was not originally expected.
It might be years, or never that we get back to the guaranteed budget that used history as the basis, but the more data and information we gather to prepare the financial modelling – budget and forecast the better.
If you are a finance person, you will smile at this article…it’s been your life for the last 3 years and it’s still impacts the way things are done.
Doing a zero-based budget, can help reset the way the business looks at the business, less reliance on prior year and resetting the cost base of the business by asking why do we need that expenditure, what is the return on investment?
There are some easy wins, and it might be what you need to balance your budget for FY24 and beyond.
Whiteark has a range of articles and resources for budgets/forecasts that we will share with you.
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If your business is having issues with cash, it's important to take proactive steps to address the problem before it becomes a crisis.