Having a cash flow forecast will highlight if there is financial strain around the corner for your business and prompt you to prepare for what’s coming. This could mean delaying payments, reducing expenses or finding new income streams.
To create a cash flow forecast you need to input the following into a spreadsheet (see below template):
- Start with your opening cash balance in the first column (include all liquid accounts)
- Add: cash inflows
- Subtract: cash outflows
- Calculate your ending cash balance
- Then in the next column your current closing cash balance becomes your opening cash balance and so forth.
- Continue the forecast for at least 3 months (note that it’s common in larger businesses to have a 3-year cash flow forecast).
Your forecast can be daily, monthly or weekly.
In the current environment, I think weekly is the right call because things are changing all the time.
Cash inflows include but are not limited to:
- Sales income received (this is different to invoiced sales)
- Government stimulus amounts if your business is eligible
- Any new bank loan and / or overdraft facilities you might be entering into
Cash outflows include but are not limited to:
- Salaries, wages, drawings
- BAS / IAS payments
- Interest payments
Now that’s all pretty straight forward when business is predictable.
But right now it’s very hard for some of us to confidently forecast Sales. Accordingly, I would suggest using your forecast to play around with some possible scenarios that might play out in the next 3-6 months.
- Scenario A: Sales reduce from April because of COVID-19. No action taken. Cash runs out by May.
- Scenario B: Sales reduce in April per above. Sales increase in May due to launch of a new revenue stream such as an online course. Cash levels stay at healthy levels in order to see out COVID-19 crisis. Regular sales resume in July.
When the forecast shows you the months that cash is going to be tight in, have a think about what actions you are going to take to stem the outflow. Plot those changes in your forecast and use it as an evolving guide to prepare you every week for what’s coming next.
Cash is always king. But in times of crisis understanding your cash position is more important than ever to ensure your business has what it takes to make it to the other side.
If you need a simple cash flow template to get you started, download yours below and get started.