Current actuals (like invoices and payables you’re know about)
Future expectations (like sales and purchase you expect to come down the pipeline
Trends (making estimates based on what has happened in the past)
We will get into those later in the How To.
Think debt payoff, sales tax payable, and other balance sheet items that don’t hit the p&l. Also important for industries that operate with credit terms — when customers get invoices later for services of product.
Whether this is something a client has asked you to do or if it’s something you’re looking to add to your service offerings to increase your value, Ive got ya covered. You don’t need a fancy app or tool, especially if it’s a simple business. You just need to know all the moving pieces.
What are all the moving pieces? Well, that’s what’s next:
But the more complex the business, the more complicated it gets.
For example, if they use purchase orders, pay vendors for product net 30 or net 45, plus have inconsistent sales, and have debt payments, it’s a little more work. You just have to understand their business and get the whole picture.
It’s important to utilize an accounting system first, to enter all of the bills due and receivables and reconcile the bank account (or match bank feeds) before you prep the cash flow.
So here are the steps. If one thing doesn’t apply, skip it and move on. I’m going to assume that you have access to Xero or QBO to be able to run some reports, as well as access to the bank.
Enter all invoices (Accounts Receivable) and bills (Accounts Payable) with accurate due dates. If the business owner hand writes checks and you get them later, you need to know as soon as they are written and enter them into the acct system.
Match bank feeds or reconcile the bank account so you know what your outstanding checks and deposits in transit are.
Decide on how far out you want to forecast. The further out you are looking, the more things could change. I do 1-week & 2 weeks out when looking at cash requirements for accounts payable. If you’re forecasting cash based on a budget, you will probably look out months or even for the next year. For the purposes of demonstration, I’m going to do a 1-2 week forecast.
(+) Pull the current bank balance (s) - put at top of spreadsheet.
(-) Outstanding checks and (+) deposits - check to see if there are outstanding checks (run an outstanding checks report) or valid undeposited funds - meaning there are deposits in transit.
(+) AR Aging - look at the receivables that will be due in the next 7 days and 14 days. Keep in mind if customers pay on time or late, because that will impact your cash flows. This will also give your client a push to collect past due accounts if they need the money. Side note, they should be looking at this weekly if this is an issue.
(-) AP aging - same thing, look at bills that will be due in the next 7 -14 days. Input as negative (reducing future cash flows)
(-) Purchase orders received not invoiced - check to see if there are purchase orders issued that have not been invoiced by the vendor (and would be due in the next 2 weeks)
(+) Pending sales orders - check with client to see if there are orders coming down the pipeline that aren’t invoiced yet—this would be important for a drop-shipper, or for services they haven’t created invoices yet. This is usually a conversation with the client, or having access to their system with work in progress. I have a client on Cin7 and I look at their open sales orders. These are orders that aren’t shipped yet so they aren’t yet invoiced. But we know they will be.
(-) Recurring expenses - Run the P&L for the last month or two by week, on cash basis so you can see what their average weekly non-Bill expenses are like software subscriptions, bank fees, payroll, etc.
(-) balance sheet payables - there are many of these, so I’ll give some examples, but this list is not all inclusive. Look at the balance sheet to see what obligations are specific to your client.
Sales Tax Payable - look at sales tax due to date (on the balance sheet) and include this if it will be due in the next week or two.
Payroll Liabilities - look at payroll tax liabilities due to date (on the balance sheet)and include this if it will be due in the next week or two.
Income tax payable - if a sole proprietor, this won’t necessarily be accrued on the balance sheet so I always set up a separate savings account and have the client frequently transfer a percentage of sales over so we don’t have to worry about it on this forecast.
Loans and Credit Cards Payable - Look to see when loan payments are due, or run a cash flow statement for the month (by week) to see when they typically pay their debts.
(-) Allocate something for savings (tax) and profit/distributions
Sum it all up by week/month/quarter and you’ve got your future cash available. If it’s negative, your client needs to start collecting faster, increase prices, cut costs, or make more sales (likely a combination of all).