Knowledge Base - Cash Flow

13 Week Cash Forecast

The old business adage that “cash is king” seems more important in this challenging economy. While it’s always important to be in a good cash position, it’s more critical to understand the lifeblood of your business in these uncertain times. A 13-week cash forecast will help give you that understanding and put you in a more powerful position to make business decisions. The forecast should be updated on a weekly basis, so you always have an informed outlook of the coming months. While a 13-week forecast is common and represents a reasonable time horizon, you can create a cash forecast for a different time period. The number of weeks you include is not as important as having a report that gives you a reasonably accurate picture of the road ahead.

To begin you’ll need to identify expected cash inflows and outflows, as well as your beginning cash balance.

Inflows normally include: Allocate each of those inflows to the week when you expect the cash to be received.cashBalanceSheet

  • Cash Sales
  • Receivables
  • Future sales
  • Bank loans
  • Rental income
  • Any other source of cash

Next, identify outflows, which could include:

  • Payroll
  • Payroll taxes
  • Material and inventory purchases
  • Insurance
  • Operating expenses
  • Note and lease payments
  • Fixed asset additions
  • Old accounts payable
  • Other significant expenditures including quarterly tax estimates and shareholder distributions

Items on the expense side are usually easy to identify, and can be pulled from your monthly accounting records. Receivables are often less clear, and thus become the item in the forecast that is most challenging for a business to accurately project.

A good approach to get a handle on these numbers is to create three categories.

  • 1st look at major items. You may need to call your customer or sales rep to get a feel for when these items will be paid. Because of their size, it is important to do the best you can to project when this cash will be received.
  • 2nd, look at your consistent payers. Fortunately most companies have some customers that pay like clockwork. As a result, this group can be projected with some accuracy.
  • The final group is for smaller, miscellaneous items. While it is difficult to project when these individual receivables will be paid, when you group them together they tend to follow a pattern. If, for example, you have $400,000 in miscellaneous receivables, and your historical information indicates such receivables are paid in about 35 days, divide that $400,000 by five weeks to determine figures for your weekly cash forecast.

Once you have projected when your receivable will be paid, you need to add in your projection of cash receipts from future sales. In some businesses, seasonal activity must be considered in the 13-week cash forecast. For example, a construction company may have rising payroll in the spring and the related collection of receivables several weeks later in mid-summer.

Why?

The more challenging your cash position is, the more valuable this tool becomes. The insights from a 13-week cash forecast will not only help you better manage your business but also would be helpful when you need to communicate with your banker or other outsider. Let’s say you have a significant receipt due in Week 11 but your business will be in a difficult cash position prior to that. This tool gives you the ability to see what you might be able to shift on the schedule to deal with the shortfalls. It also gives you the ability to proactively communicate your situation so that your creditors know what to expect. You will find this goes a long way in gaining cooperation. Click here for a sample 13 week cash forecast. It’s worth taking the time to establish the process. Once it’s set up, it’s just a matter of plugging in the current numbers.  The report becomes even more powerful when you compare its estimates with actual inflows and outflows. With that actual data, you can adjust the report to increase accuracy.