THE FUTURE DEPENDS ON WHAT WE DO IN THE PRESENT – Mahatma Gandhi
How much time do you spend today doing the things that will impact the future of your business? So often business owners can list the top 2 or 3 three biggest challenges facing their company, followed by the admission that they’ve spent little of their overall time committed to solving those challenges.
One of those challenges commonly identified as a major issue is cashflow. Yet few spend time working to forecast their cashflow to help recognize possible shortfalls so that they can take actions before it is too late. All businesses should be using tools to forecast cashflow to provide insight into their future cash position.
Forecast are a waste of time, right?
One of the biggest pushbacks I hear about investing resources (time and/or money) into financial forecasting of any kind is that it’s just a waste time. There is no way to predict the future, and if you know it’s wrong, to begin with, why spend the valuable time guessing at what might happen. It is true that no one can predict the future, but forecasting isn’t about being 100% certain or even 80% certain. We all know the weather forecast isn’t right all the time, but we still listen. We check or watch the forecast and when it calls for rain, we take an umbrella with us. We prepare ourselves for what might occur based on the forecast. Financial forecasting, specifically cashflow forecasting does exactly that, it provides us with an additional level of certainty, although not absolute, to make decisions. It’s about spending time today, to help us improve the future outcome.
What is the benefit?
The benefit can be summed up in two words, better decisions. In a previous post, I wrote about the different silos of cashflow: operations, investing and finance. A cashflow forecast will provide insights into each of these silos. For example, your sitting on some excess cash, there is a piece of equipment you’ve been looking at so you decide to go ahead and purchase the piece of equipment and use up the excess cash, then 10 weeks later your borrowing on your line of credit to cover payroll. A cashflow forecast will help you see that turn in the road so that you can better plan that equipment purchase. Think of the benefit of cashflow forecasting as the benefit of driving with headlights at night, there is no guarantee something won’t jump out in front of you, but you can sure plan the road better than driving without them. Every decision a business owner makes has some level of uncertainty included, the measure as to whether the benefit of spending time forecasting your cashflow is worth investing the resources is in how much it reduces the level of uncertainty in decision making. Take the time today to plan for future events; it will eliminate future stress so you can focus on your business today.
How to do it?
The first step is a mental step; you must make the commitment, preferably weekly but at least bi-weekly to spend time updating your forecast. I would recommend a 56-week rolling forecast, but you could start out with a 13-week rolling forecast until you’ve mastered your process. The forecast should be broken into the three silos mentioned earlier, operations, investing and finance, then further segregated into two buckets, what you know and what you’re estimating. An example of what you know would be your installment loan payments or your payroll for salaried employees. An example of what you’re estimating would be your hourly payroll 6 weeks from now. By separating the items into known and estimating buckets you can determine how much to rely on the forecast for a given period. For example, if most the forecasted items are in the know section for the next 4 weeks, you can feel confident in the forecast for that short period. The further you go out, obviously, the more items will be in the estimated bucket and less reliable the forecast becomes, however each week as you get closer to that time period the better it will become in focus. You can prepare your forecast manually, but I highly recommend working with someone to help automate the process by linking it to your accounting system, wherein 70-80% of the forecast can be automatically updated each week and you spend your time fine-tuning the items you know.
In my post, Know your numbers, I discussed what it meant to really know your numbers. Knowing your numbers comes into play with your cashflow forecast, in that if you know things about your business such as accounts receivable days and accounts payable days, you can use those to help forecast cash receipts and disbursements. As discussed in that post, if you know the number of how many proposals have to be submitted to generate one sale, you can use that information in your forecasting by looking at how many proposals you are scheduled to present. The Key Predictive Indicators that you may be using to help operate your business, can be a great source of cash forecasting information.
I would challenge you to give cashflow forecasting a shot for four weeks. If you don’t find it to be beneficial after four weeks then you can forever say it’s a waste of time. You can access a 13-week rolling forecast template as a free resource on our website www.trainerwright.com to help get you started. I am confident you will find that by spending the time performing the cashflow forecast you will learn more about your business, highlight potential problems, make better decisions and have a very useful tool in growth planning. These are just a few of the benefits you are going to find by making this commitment. Make a better future for yourself by spending the time in the present to prepare.
Post by Todd Williams.
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