Cash flow forecasting is a straightforward method to ensure your working capital needs will be met for your business, regardless of size. Hardesty partners have worked with businesses where a strong cash flow forecast meant the difference between thriving and closing the doors, especially during economic downturns or an unexpected financial crisis.
A 13-week cash flow is an appealing structure because it provides simple visibility into when cash will come in and what order obligations need to be addressed. Unlike the balance sheet and income statement, which require 100% accuracy, a cash flow forecast isn’t a historical record of performance, but it’s a projection of future items affecting cash in and cash out of a business.
Though many CFOs rely on a 13-week cash flow to manage business finances, anyone with access to the company’s financial records can develop it, including sole proprietors and other businesses with a lean staff.
Setting Up a 13-Week Cash Flow Report
Step 1: In a spreadsheet, set up 13 columns, one for each of the next 13 week endings.
Step 2: Start each column with a beginning cash balance.
Step 3: Add expected accounts receivables receipts and other cash receipts, itemized as relevant, including investment and financing proceeds, and any other sources of expected cash.
Step 4: Subtract accounts payable payments, payroll, commissions, debt service payments and all other expected cash payments, itemized as relevant.
Step 5: Close each column with the ending cash balance. The ending cash balance becomes the beginning cash balance for the next week, and you can start back at Step 1.
You can create a “rolling” 13-week cash flow by replacing the first week with actuals and adding another column to the end, and updating all weeks to reflect any changes in assumptions. This is done at the end of each week so you are always forecasting a 13-week view.
Rules of Thumb when Developing an Effective 13-Week Cash Flow
• Be patient. It can take a month or two before you feel like the 13-week cash flow is really helping you manage your cash.
• During times of tight cash flow or rapid growth, update the cash flow at least once per week.
• Determine the top 5-6 items of cash (in or out) that affect the forecast the most, and focus most of your time on those items (for example, sales revenue, payroll or A/R collections).
• Even though the cash flow forecast does not require staunch accuracy, a good 13-week cash flow forecast doesn’t stand alone. Information included in the forecast should be supported by the income statement and balance sheets.
A good 13-week cash flow will allow your business time to react whenever there’s an increase or decrease in the cash balance. Depending on the situation, you’ll know when to add pressure to A/R collections, arrange for new debt or equity, make investments or pay off costly debt early.
Hardesty clients often benefit from the 13-week cash flow forecast. If you need help gaining visibility into your company’s short-term future, visit hardestyllc.com.
