Most finance professionals view the “13-week cash forecast” as a burden – another task to satisfy an overbearing banker. The fact that the forecast is less interesting than an analysis of an acquisition or investment doesn’t help. People often prioritize these forecasts only in desperate situations when it’s too late to correct the problem.
What are Weekly Cash Flow Predictions?
Weekly Cash Forecasts can be used to estimate a company’s cash flow over the medium term by estimating timing and amounts. Weekly intervals force companies to examine their business in greater detail. Cash inflows can be high one week if receivables have been collected well, and outflows huge the following week if rent or payroll is due. Cash flow reports broken down weekly can capture granular information that is otherwise missed when using quarterly or annual intervals. Why not make a daily forecast? It can be overkill, as it has seven times more variables than a weekly forecast. And it may not increase the accuracy of a prediction. The weekly interval is a good compromise between granularity and detail.
The industry standard for a forecasting period is 13 weeks. This is the number of weeks that make up a quarter. Ideally, a business should be able to predict how costs and revenues will change in the next 13 weeks. It will be hard to react effectively to issues of liquidity if you project only four to eight weeks out. It is important to project out far enough to allow your team to respond but not too far so that there will be no certainty.
Arguments against weekly forecasts are short-sighted.
Some of you have probably used one or more reasons for not doing the forecast.
It’s great that you did, but they were all in distress situations. Weekly cash reports are a waste because my business is in good health.
I have a small (or no) team and don’t have the time to prepare weekly cash flow reports.
“My business is doing well and I see no reason to think otherwise.”
Cash forecasting does not apply to my business because it is different from the companies you describe.
“My shareholders/lenders/parent company believes in us and has deep pockets. They will cover any shortfall in cash if there is a problem.
All of these examples are relatable but short-sighted. No matter how successful a company is, it will face tough times. We must not forget the Great Recession when blue-chip companies (e.g., Goldman Sachs, Morgan Stanley, Lehman Brothers, Bear Stearns, etc.) were at their zenith. They were brought to their knees. Would a cash forecast for the week have prevented this disaster? Perhaps not. What I can say is that these companies did not have a clear understanding of their liquidity requirements, which would have helped to mitigate the damage. Operators need to be aware of the limit on their liquidity.
Cash is King mentality forces discipline.
Accounting tricks cannot be used to conceal underperformance. GAAP may help to cover business problems, but it’s hard to hide issues when you focus on cash. Businesses that are subject to seasonality can benefit from focusing on near- and medium-term time frames.
Improved understanding of suppliers and customers
The process of stratifying customers and suppliers can provide insights on key customers and vendors, depending on the circumstances:
A customer who is slow to pay can be called as an excuse. Instead of simply demanding payment, it can be another revenue-generating opportunity–assuming your company still wants business from this customer.
Certain suppliers may offer discounts for early payment. By managing cash flow, a business can take advantage of the discounts.
When certain vendors are flexible with their terms, a company can increase its cash flow and decrease its net working capital by stretching some of its flexible vendors.
Understanding the cost of business growth is important for businesses
Cash is often a problem for growing companies, as capital expenditures and investments in inventory must be made before the revenue generated by the growth. Understanding the near-term cash needs of a business allows it to plan and secure financing for development. This helps the company avoid financial difficulties or, even worse, failure to deliver.
The cost of capital is reduced.
Understanding liquidity allows a business to minimize the use of credit for interim payments such as rent and payroll. Other times, a business can reduce its cash on hand by investing it back into the company, paying down debt, or distributing dividends.
Communication with other departments is improved.
To properly complete the cash-flow forecast, the finance department must communicate with colleagues from sales, purchasing, accounts payable, receivables, human resources, etc. This forces finance experts to gain a better understanding of how the business operates.
When and What Types Of Businesses Are It Appropriate For?
Understanding incoming and egressing cash flow and taking the appropriate action can help to avoid financial stress in many situations. Cash forecasting is beneficial in all cases. Cash is king! I strongly believe that all companies, big or small, young and old, should use this tool. Even the weekly cash flow forecast is customizable to fit every business type.
For companies in desperate situations, this is invaluable.
In the fall of 2008, I was skeptical about its value when I received my first cash forecast. The company I worked for at the time was a distributor that provided services to companies in the construction and transportation industries. With the forecast, we could see when customers were actually coming into our shops and when money was being deposited into our account. Cash flow and business performance both improved despite the difficult economic climate. We noticed that certain buying patterns caused sales to spike on certain dates of the month (1st, 10th, and 20th). This trend was capitalized by the company, which ran promotions on those days in order to increase the average dollar per order. I became a quick believer.
We avoided disaster in another case with a service business because the cash forecast predicted that we would be out of money the next month if the banks demanded a mandatory payment. We were about to run out of cash in the next month if the bank forced a compulsory repayment. The company did more than $100 million in sales a year, but the seasonality was going to leave us with a $1,000,000 hole. The forecast helped us convince the bank to lower the amount they required for debt repayment and allow us to get through the seasonal cash crunch into more profitable times. The accurate insight into our business not only helped us avoid a financial crisis but also built our credibility when we presented our re-forecast for renegotiation of our covenant package.
