This is the second in a series of articles to help business plan their cashflow. The first one is about short term cash flow and can be found here. In this article, I am going to share my top tips on how you can design and build a cash flow forecasting model and use it.

Assign a senior director to take direct control of the cashflow process

• A senior director may have to have conversations with key customers and suppliers to understand the impact on both businesses and come up with fixes or workarounds.
• Communicate the cash position and forecasts with the Board on a regular basis and document the decisions taken.
• Funders will be reassured that cashflow management is being taken seriously by the Board.
• Ultimately the Board need to be confident that the business can survive.
• Take professional advice.

Update your procedures

• Consider the appropriateness of spending limits and budgets across the business.
• Tighten control over spending to ensure that spending matches a revised business plan.
• Enhance your credit checking procedures and reduce exposure to higher risk customers if possible.
• Resolve disputed invoices quickly with customers to speed up receipts.

Build the cashflow model

• Try and integrate profit and loss, balance sheet and cashflow into the same model – this will help with the accuracy as you will see the movement in assets and liabilities.
• Use the right timescales for the right job. The Bank may want a 12-month forecast but to make day to day decisions you may need a weekly or even daily forecast of the cash position.
• Beware if you are only using monthly forecasting that you know if the cashflow is at the beginning or the end of the month. For example, if customers pay on the last day of the month but payroll is on the 25th of the month – although the model says you will have cash at the end of the month the exact day/week may be critical.
• If cash is particularly tight then you may need daily forecasts and reconciliations to actual to make sure that you have the cash in the bank to make the payments.
• Make the cashflow report simple to understand for the rest of the board – focus on KPIs that they measure and show how they impact on cash.
• Highlight key assumptions and test those with what-if scenarios.
• Key numbers will be opening cash, cash in, cash out and closing cash.

Improve the model

• Reconcile the bank accounts more often and use this information to update the cashflow forecasts – in some cases this may need to be done daily.
• Involve teams from across the business to provide the best available information to feed into the forecasts.
• Be prudent in assumptions.
• Monitor actual against forecast.
• Check the logic of the spreadsheet or model. Errors frequently creep in.
• Sanity check the forecast with other reports produced by the business.
• Keep updating the model to reflect the current position.
• Understand the cash flow cycle for your business and your customers and focus on cash generation – for example, are sales invoices being generated quickly enough so that they land in customers accounts departments in time to meet the pay run for the month.
• Keep track of external factors that impact cashflow – for example, the government schemes for furlough and loans, grants, rates and tax payment holidays.

If you need help with your cashflow forecast or if you forecast shows that there is not enough cash, give us a call to talk about how we may be able to help.