30 May 2021

Weekly & Monthly Cashflow Forecasts | When & How To Use Them

Weekly & Monthly Cashflow Forecasts

Two types of cashflow forecast

There is sometimes confusion about what a cashflow forecast is trying to achieve. There are two types: a short term weekly cash flow forecast, looking around twelve weeks ahead and then a longer term, monthly forecast, generally projecting over one to three years.

Weekly Forecast

A weekly or daily cash flow gives short term visibility on the day-to-day cash management. It is a firefighting tool rather than fire prevention; vital, but needs to be complemented with some longer term planning.

This is a detailed model with receipts lines for key customers. Payments to main suppliers are shown separately, as are most expense lines. Within each company there will be a sensible limit of what can be lumped together in an “other” category.

The model should cover a period that allows you to take action. Typically, this will be between six and twelve weeks. You need to see the elephant coming over the horizon, not a looming silhouette appearing right next to you. I find that having a daily forecast for four weeks followed by weekly totals for the following six to ten weeks achieves the balance between time and benefit for most businesses.

To estimate receipts you need to know what is currently outstanding from previous sales and estimate sales for the next few weeks. Applying actual payment terms to these then generates your estimated cash receipts. This is why it’s normally necessary to have supporting workings from your sales and orders feeding into the cash flow.

This is an actual estimate, not a theoretical calculation. If your largest customer has net monthly terms but always pays around the 20th of the month, the forecast should start with what is likely to happen rather than what should.

One of the greatest benefits in preparing a short-term cash forecast is that it puts your mind at ease. One of my clients was getting understandably concerned with the VAT quarter payment coming up and didn’t believe their company would be able to make this in full. They had been playing different scenarios through in their head based on gut feel. Actually quantifying the size of the potential problem provided clarity and the basis for objective discussions. Instead of running through the scenario in their head, both consciously and subconsciously, throughout the day and night, by putting the matter down on paper (well a spreadsheet actually); they could put it to one side and concentrate fully on other aspects of the business without it constantly gnawing away at them.

With a detailed short-term cash flow forecast, you can quantify your best estimate of your funding requirement. Which of these two statements give you the most confidence in how the situation is being managed:

“I think I probably need some more money…”

“Based on normal customer receipts I’m going to need £25,000, with a maximum of £30,000, for the next four weeks starting at the end of next month.”

Monthly Forecast

A monthly cash flow forecast serves a different purpose to the short term daily/weekly one. This forecast is generally for between one and three years. It looks at trends over time, underlying profit and other cash factors such as new loans.

It is ideally linked with the profit and loss statement and balance sheet. When linked with these other financial statements it is called an integrated or 3-way forecast, giving a rounded financial view of a business. For this reason, the linked model is often a requirement of funders when looking at potential lending or investment decisions.

The forecast is based on assumptions such as sales, payment terms, overheads by category and staff costs. The time spent considering these assumptions is often the most valuable part of exercise as it ensures a strategic thought process is engaged.

The forecast will show a cashbook position at the end of each month. This is not always the same as your bank account balance, for example if funds have not yet cleared. It also gives the month-end positions, not the peak requirements during that month.

The monthly forecast can be used for strategic “what-If” planning when the assumptions used are flexed. What if we increased our sales team but there was a three-month delay before we saw the benefit? What if we invested in new machinery, what cash would be needed and how much would profits have to increase to pay for this?

Cash is the lifeblood of any business and a cashflow forecast is a key tool in helping to manage this. A good understanding of your cash flow movements gives you valuable information for business decisions, both short and long term.