September is back to school month. After the relaxing summer holidays, it’s a good time to reassess where your business is at currently, and where you would like it to go. One way to achieve these goals is to build a cash flow forecast.
Many smaller businesses do not prepare budgets and forecasts, usually due to being too busy and/or lacking expertise. In the corporate reporting world of large enterprises, this is a seemingly endless process that can consume up to half of the year from commencement to final board of directors’ approval. Suffice to say that it’s taken seriously!
The cash flow forecast process can be broken down into several steps.
Start with your initial bank balance and all known monthly business expenses for the next 12 months. Add in any projected monthly capital expenditures, and your monthly owner’s draw. Don’t forget to include your monthly/quarterly/annual government payments (GST, PST, CPP, EI, WCB, income tax). Also remember any annual costs and subscriptions such as insurance, chamber of commerce fees, software charges, membership dues, professional advisor fees, etc.
If you run vehicles through your business, do some estimating based on prior experience of your monthly costs for fuel, insurance, tires and maintenance. Depending on vehicle age, plan on at least one unforeseen vehicle repair per year.
That covers the easy stuff (expenses), but how do we forecast sales? Start with known contracts and recurring revenues. Plug those into your model based on best estimates over the next 12 months, either by customer, product line or service category – whatever best suits your business.
Next up is the tricky part of modelling new business sales. Review your sales leads, potential/existing/past customers and try to figure out what sort of business you may be able to do with them. This is partly a goal setting exercise as many businesses do not have recurring revenues. It’s also a very good tool to hold sales personnel accountable for translating leads into firm sales – get them involved in this process too.
Review your monthly net cash balance – if expenses exceed revenues, you are net negative and need more sales. Revert to your sales forecast and see how many new customers you need to add to rectify this. If, or when, you are net cash flow positive, double check your capacity utilization – do you have sufficient resources (staff, hours, machine time, product inventory, etc.) to achieve these sales projections?
Remember to take seasonality into account when modelling – for example holidays and winter vs. summer trends. Review your closing balance monthly over the next 12 months. If it’s negative at times, do you have sufficient working capital/bank line of credit to cover the shortfall? Or can you reduce expenses that month, or try to achieve more sales?
Now save this file with a meaningful name and date, and don’t forget about it until next year! Review monthly – overwrite your forecast numbers with actual, see how/why they differ, and modify your future months accordingly. Do this for a few months and you will probably see some trends emerging. As overheads are less variable than sales, the sales forecast is usually the ongoing challenge. Use this as a focal point in meeting with your sales personnel at least monthly – it keeps everybody engaged.
Hopefully this is a helpful overview – feel free to contact us if you have more specific questions.
Strategic Risk Management Solutions Inc. is based in Penticton and provides management consulting services which optimize strategic opportunities and mitigate downside business risks.
250 328 4935