Cash flow forecasting basics come down to one question: how much money will be in your bank account each week, and will it be enough? A cash flow forecast is a simple table. It lists the money you expect to receive and the money you expect to pay out. It then shows the balance you will have left. You can build one in a spreadsheet in an afternoon.
Why profit is not the same as cash
Your books can show a profit while the bank account runs dry. The reason is timing. You may send an invoice in November and get paid in January. Your rent, wages and suppliers still need paying in the meantime.
Enterprise Singapore calls cash the lifeline of a business. It points to the whole cycle, from taking an order to collecting the payment, as the place where money gets tied up. Every step of that cycle needs working capital to fund it.
Records of past payments show where your money went. They do not show what is coming next. That is the gap a forecast fills.
Sources: Enterprise Singapore, "Ways to get your business into a good financial position" (first published 26 May 2020), https://www.enterprisesg.gov.sg/resources/blog/ways-to-get-your-business-into-a-good-financial-position.
Set up a 13 week forecast
Thirteen weeks is about one quarter. It is long enough to see trouble coming and short enough to guess with some care. Most regular bills and invoices fall inside it.
Start a new sheet and list the weeks across the top, week 1 through week 13. Put three blocks of rows down the side: opening cash, money in, and money out. At the bottom, add a closing balance row. Each week's closing balance becomes the next week's opening balance.
Start with your real bank balance today. Do not use a number from memory. Then fill in the weeks one at a time.
List your inflows and outflows
For inflows, write down only cash you expect to land in the bank that week. Sales you have made but not yet been paid for go in the week you expect payment, not the week of the sale. Add other money too, such as a loan payment received or a tax refund.
For outflows, list every payment by the week it leaves your account. Common items are rent, wages, supplier bills, loan repayments, tax payments, insurance and utilities. Include the one-off costs you already know about, such as a new machine or an annual licence fee.
Split your costs into two groups. Fixed costs, like rent, stay the same each month. Variable costs, like materials, rise and fall with sales. Fixed costs are easy to forecast. Variable costs need a guess based on your past months.
Sources: Enterprise Singapore, as above, on reviewing revenue, expenses and cash flow against earlier periods to project future figures.
Plan for slow payers
Late payment is a common reason a forecast turns out wrong. If your terms say 30 days, do not assume every customer pays in 30 days. Look at your last few months of invoices. Find out how long customers really took. Then use that real number.
A good test is to push every expected payment back by one week and see what happens. If the business still has cash, the plan is safe. If the balance goes below zero in week 6, you now know you have time to act.
Look at your suppliers too. Enterprise Singapore notes that collecting from customers faster than your own supplier credit terms reduces the need to borrow. If you can agree longer terms with a supplier, that eases the pressure. Ask early, before you are short of cash, not after.
Sources: Enterprise Singapore, "Ways to get your business into a good financial position" (first published 26 May 2020), https://www.enterprisesg.gov.sg/resources/blog/ways-to-get-your-business-into-a-good-financial-position.
Warning signs to watch
Compare your forecast with what really happened every week. Write the real numbers in beside the forecast. Do this even when the gap is small.
Some signs call for quick action. Your real balance is below the forecast for several weeks in a row. Customers are paying later than before. Your closing balance falls near zero in any week. You are paying bills late to cover wages.
When you see one of these, act the same day. Call the customers who owe you money. Talk to your suppliers about timing. Talk to your bank before you need an urgent loan. Banks and lenders respond better when you ask early, with a forecast in hand.
Sources: Enterprise Singapore, "Ways to get your business into a good financial position" (first published 26 May 2020), https://www.enterprisesg.gov.sg/resources/blog/ways-to-get-your-business-into-a-good-financial-position.
Keep it rolling
A forecast is only useful if you keep it up. Once a week, replace the oldest week with the real figures. After that, tack one fresh week onto the far end. You will always see a full quarter ahead.
Keep the sheet plain. Few lines, clear labels, one person responsible. You can add detail later if you need it. A simple forecast you update every week beats a complex one you never open.
This note is general information only. It does not replace professional advice on your cash plan, so check loan or tax questions with a qualified accountant.
Sources
- Enterprise Singapore, "Ways to get your business into a good financial position": https://www.enterprisesg.gov.sg/resources/blog/ways-to-get-your-business-into-a-good-financial-position