Weekly vs. Monthly Cash Flow Projections

I just got an email from the U.K. affiliate of a
U.S. customer who was demoing the cash flow projection capability of SurvivalWare Desktop to a group of franchisees.  Their response was that they’d like to see weekly cash flow projections for the next quarter, not just the monthly cash flow projections. 

I’ll never forget a presentation I did to a group of
U.S. franchisees from this same group.  One of the Key Performance Indicators (KPIs) I put up on the screen was “Days of Cash.”  This is a measure of how long you could last if cash flow completely dried up.  The feedback from the audience (joking, I assume) was “Can you show minutes of cash?”

So, yes, cash is important.  It is high on the mind of even the most successful entrepreneurs.  If you run out of it, the game is over – or at least no longer fun.

Monthly Cash Flow Projections

Monthly cash flow projections are easy, by comparison – especially if you’ve got a good financial model already built.  First you load up history from your accounting system.  Then you project forward trends in Sales, Expenses, and key drivers such as Collection Period and Inventory Turnover – and the model creates a full set of financial statements for the next several months.  You can answer the question, “How much cash will I have six months from now?” in addition to “How much profit will I earn?”

Weekly Cash Flow Projections

Weekly cash flow projections are a horse of another color.  You have to roll up your sleeves and get your hands dirty at the transaction level.  The devil is in the details, and you have to take the time to gather the requisite data, and plan things out.

You can use your check register as a guide to help figure out what expenses are due when.  Your payables system will have at most what is due in the next 30 days, and generally less than that.  A common goal when doing weekly cash flow projections is to look at the next quarter, or 13 weeks.

Since payroll (and payroll taxes) account for 50% – 60% of your total outflow, you first get these precise dates and amounts figured out.

Next are regular monthly expenses such as rent, lease payments, and telephone.

Credit cards are a challenge, but treat these as regular monthly expenses, and figure out how much to pay each month the best you can.

If you have old creditors, include these in a special section.  You may need to play around with due dates and amounts to come up with a workable plan.

If you can put this data in a spreadsheet with separate columns for date due, description, and amount – there is a way to process the data in Excel to calculate total due week by week. (Click on www.survivalware.com/download/Weekly_Cash_Flow_Forecasting.xls)

The other side of the equation is cash coming in.  This is much less under your control, and harder to forecast.  If you sell on account, your accounts receivables detail is a good place to start.  Make a list of each invoice, its date, and the date of expected payment.

In addition to collections from existing Accounts Receivable, there is the cash generated from making new sales, and collecting those.

Finally, there are special cash events such as loans from credit cards, or investments from Uncle Joe.

The final calculation is this:

Enter your current cash balance as the beginning Cash Balance for week 1

For weeks 2..13:

Beginning Cash Balance is equal to the prior week’s Ending Cash Balance

Ending Cash Balance = Beginning Cash Balance + Receipts – Payments

Some Hints:

For due dates on payments, choose a date 5 to 7 days before the payment is actually due to represent when it is you actually cut the check

  • Add a phantom “contingency” payment each month equal to 5% of your total expenses.  There is always something that comes up unexpected.
  • Do some analysis of your past sales and accounts receivable to estimate the collection period.  A/R divided by Daily Sales gives you what is called A/R DSO:  Days Sales Outstanding of Accounts Receivable.  This is a way to estimate collection period.  Try calculating daily sales by taking the last 3 months worth of sales divided by 90.  See how your A/R DSO performs over time.
  • Try projecting out 3 months worth of payments and receipts, which is 13 weeks
  • If your ending cash balance is projected to stay above zero for all 13 weeks, that is a good thing!
  • Do a barchart of the Ending Cash Balance to see how things look at a glance.
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