How do get a helicopter view of your cash flow forecast!

So here you are, ready to dive into the fantastical world of predicting the future cash flow of your business. Well done you, for being willing to have a go.

Cash flow forecasting is one of those things that can seem really confusing and really overwhelming, and then one day it will just click and you will think to yourself “what is all the fuss about? This is so damn easy!” As with most things financial, there is a bit of a rhythm that you need to find and once in it, you can groove away for a very long time.

At the end of the day, cash flow is part art and part science. It is not something you ever want to get 100% right because that would just be too difficult and time-consuming to do. By the time you get your cash flow 100% accurate, you will have no business left! And the good news is that it doesn’t have to be 100% accurate to give you control over your cash flow.

The trick is to find the rhythm that resonates for you and for your business. Because it will be different for every business and every business owner. As small business owners, who we are infuses in all of our business. So if I am preparing a cash flow forecast for two electrical contractors, two law firms, two marketing consultants or two chiropractors they will all be different. Even though the service the business is providing is identical, the nature and personality of the person providing it is different and that will affect the design and working of the cash flow forecast.

So what we are going to do over the next month is to work our way through putting together what I call a ‘back of the envelope’ cash flow forecast for your business. I’ll take you through it step by step and this week we will begin with what I call a ‘helicopter view’. We will look at the overriding principles at work and the key things to remember as you begin this adventure.

Cash flow forecasting might as well be fortune telling
So go on, put on your gypsy outfit, polish up that crystal ball, light up the candles and let’s get going. In its most basic form cash flow forecasting is all about estimating or guessing what cash you will deposit and withdraw from your account over a period of time. Even estimating that for a week can be difficult let alone for a month or a year.

You see the problem is you not only have to guess the correct amount but also the correct timing not only for each type of income and expenditure but also for the slippery little suckers that lurk in the background and drain your cash. We’re going to call a single type of income or expenditure or slippery little sucker a line item on your cash flow forecast.

We’ll get into the specifics in the coming weeks but you will find there are some types of income and expenditure where both the timing and the amount are a no-brainer. For others, the amount is certain but the timing can be difficult to pinpoint. Others are just plain tricky.

Some line items will have a rhythm or pattern to them that will help you to guess what will happen. For instance, you might know from past experience that what you invoice your clients for this month will not hit your bank until the end of the following month.

At the end of the day, it is all about guessing and the further out your forecast goes, the more guesswork is involved. Now because accountants are not frivolous or impulsive or imprecise we don’t like to call them guesses so we call them estimates based on documented assumptions.

It is a good thing to write down your assumptions for the more tricky line items because that will help you to refine your guessing principles as you get feedback from your actual cash flow.

A fundamental rule of business
Don’t wait until you are in financial trouble to prepare for financial trouble because by the time you are in trouble you might not be able to do anything about it.

I live in a suburb of Sydney that borders on a vast expanse of beautiful Australian bush and towards the end of spring all my neighbours are busily preparing their houses, properties and families for bush fire season. There is no point in waiting for the fire to be roaring up the gully before you pack your survival kit and clear the leaves out of the gutters, no point in waiting until the exit path is blocked to evacuate your family.

The local fire authorities have documented fire preparedness and survival plans that can be downloaded from their website and this is exactly what you need for your business. Those business owners who have a handle on their cash flow fare much better when financial pressure hits because they are ahead of the game.

The general rule of thumb for every business is that controlling your cash flow requires more precision and more time the deeper you are in trouble. And of course, this is often the time when you can least afford to spend the time yourself or to pay someone else to do it for you. So the more you have done ahead of time the quicker you can ramp up to the level of detail you need for the level of crisis you are in.

This is not to say you need to have a full blown daily cash flow forecast to work from all the time however if you had done that during the good times it will be relatively easy to ramp up to that again when you need to. The back of the envelope cash flow forecast I will show you how to prepare over the next month will be a good launching pad and provide you with sufficient control in the good times and the basis for a more detailed version in the bad times.


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