13 Week Cash Flow Model: Financial Forecasting Tutorial

[00:00:00]if your business is an airplane consider that the fuel tanks are your cash if you don't have enough cash there's no fuel in the tank and the plane your business will crash I repeat if there's no cash or fuel in the tanks your business will [Music] crash welcome back to the basics of business Channel everybody and I'm not going to claim uh credit for that analogy that's from a got Donald Miller who's an author uh business author in the states talking about cash flow and how important it is and you will been on a series of videos of using a spreadsheet to give examples of financial control and how tracking predicting compare the three stages and of all the things when it comes to predicting cash flow is AR arguably it's the most basic but it's the most important absolutely yeah I mean you can be profitable and still run out of cash for very you for various reasons and uh so I think making sure you're on top of what money's coming in when it's coming in what's going out when it's going out making sure that you are going to meet those payment deadlines and things absolutely vital and you know we we we've done a video with sort of the long-term business plan type thing of like the next 12 months profit and loss account linking a cash flow to that so that you can see if there are um dips and things but the the issue with those is they only look at the month end so it's it's you know we we did a 12 Monon p&l Forecast January to December we then put in a cash flow and we could see that at the end of January this much cash would be required at the end of February but actually things happen during the month if you're employing people your pae liability is due on the 22nd of the month not the end of the month so the 22nd of the month might be the cash low Point um that you should be tracking and so what you find is that most people accountants and CFOs and fds they'll be looking in at a much shorter term so traditionally you see a sort of 13 week cash flow so um and certainly if you talk to Banks and and other accountants a ring 13we cash flow is a fairly standard document um and you know trying to predict what's going to happen in 12 months time n on Impossible trying to predict what's happening in 13 weeks time is still very difficult um depending on what your business is but trying to predict what's going to happen in the next few days and weeks is a lot easier still not 100% accurate you're still having to make assumptions about things but you know keeping a track of what what's going on in the next few weeks and a bit further 13 weeks if you are Vat registered you have to account for vat in a ctly basis so you'd want to know oh I've got money in the bank now but in 13 weeks time I've got to find X to pay my vat you're going to want to be able to plan for that and it's a bit of a hard thing almost sometimes to get your head around particularly just maybe you're done your business plan and it's your first year in business of the numbers look great yeah and the sales are going according to plan but these sort and they're not we're talking about there of things that are predictable potentially in terms of wages but then there are shocks to the business as well and without this shortterm cash flow out like for example The Helpful content update with Google things I run out a Blog and I've seen other blogs lost 50 90% of their traffic within a week just with a Google update so beyond the things that are predictable there's also shocks and without this short term view of the world the business can go down pretty quick pretty quickly yeah Absol in in the worst case scenario I mean I if something like that happened if if you've got uh your sales dry up for some reason or one of your customers goes into liquidation themselves and you're not going to get paid you're going to have that bad debt then knowing what's got to be paid in the next few weeks will be vital because you'll be able to know what have I got to do what have I got to juggle I need to go and talk to my suppliers and negotiate better payment terms I need to go to the bank and explain what's gone on demonstrate that the business is still profitable and and try and get some support from them so having that shortterm view um for those surprises is is very important and I said we've got a you know we'll go through shortly a 13 week cash flow um generally when I do them you know they're not really linked to anything it's just a a spreadsheet that you you just fill in the numbers that you think are going to happen it sometimes I can link it to other source documents but generally you're looking and thinking right well what is going to happen next week yeah it can be that fluid that you you you do it um you just do it from from just typing the numbers in rather than it be some amazing financial model okay so this spreadsheet we'll put a link in the description it's downloadable use it for your own business Etc um but we go into it now and show you practically how you can track over 13 weeks okay so um as we said we're just going to show you an example of a 13 week cash flow and you know literally week one to week 13 and as as I said you'd look at quarterly um because there are certain things that get paid quarterly so vat is one but even if you're not vat registered generally rent is paid on a quarterly basis um and so you know knowing again that oh in 10 weeks time I've got to find the rent making sure you've got that set up um here it would help you plan for it and as we said it's it just means you can you you can see where so we put example data in here just to give some some key ter so looking at this one obviously completed what are the key things that you think you would pick out in relation to this 13we forecast yeah so again you the way you'd set it up I say it's 13 columns um you don't really need the total there because you're not really interested in in that it's it's a rolling 13 weeks um so you'd want to have you know the money coming in usually people put that at the top um so it's the sales are you putting any loans in are you receiving any investment is there anything else so you'd have the total amount of money coming in then you'd have your pay pay going out so here cost of sale some Finance costs accountancy cons you again sometimes um you might just have one line there that just says you know the sort of purchase Ledger and then you might have standing orders and direct debits you might have um capital expenditure whatever and just have a don't have the breakdown here most people would break and we always advate the more data you have obviously more time consuming to create it however it gives you a better view well if you are going to use it to try and manage any surprises the more detailed because you could be looking at this going oh I've got to pay for the legals well actually I can go and talk to my lawyer and ask him for extra time to pay and say I'm actually I'm not paying you up front I'm going to pay you in week five yeah and you know so long as you keep your word suppliers and things you know will generally try and help you not all of them but you know some do um so as I you know as I said I don't really link this to the the other spreadsheets if you were doing the ledgers or if you were um if you were using zero or Sage or anything I generally would just plug in here so what what am I expecting to receive in sales next week well I know ABC limited owe me 7,000 so I'm and they said they're going to pay me so I put that in there what do I think am I going to get in week two oh there's those two people owe me money they said they're going to pay that you know and you might end up having it much sort of lumpier as I sort of got week four there's more coming in because it's generally that would be the end of the month and lots of people pay at the end of the month so you might have very low numbers here and a lot of money there which like we were saying at the end of the month oh we've got a real really Prof healthy cash balance but actually it all comes in at the end of the month so how do I cope with these three weeks when I've got to make my payments out well you could then structure what you're going to pay and when so you could be talking to your suppliers saying I'm going to pay you at the end of the month yeah I'm not paying you know or I'm going to pay you at the end of the month following um when you've um when you've paid me so having having this just gives you that say flexibility to move things around um and make sure that the money coming in less the payments going out so you've got your cash movement cash brought forward I've just said there's a pound cash carried forward so we can see that actually we need £13,000 and then we're going to be cash positive So based on the numbers that we put in here and the main reason we're cash positive is because the cost of sales so we're selling all these things but the actual and I'm predicting people are going to pay us quickly but we're not paying anyone until about the end of the second yeah end of the second so if that changed and that actually went to to month four then it obviously yeah yeah so if we actually said oh they want us to pay at the end of the first month then there we would probably have you know you'd have something like that and suddenly yeah we stay over you know we have a Peaks and TR throughout the the month because things are CH and literally you we we just moved that forward a month yeah put that up because that's what we had there and so yeah just playing around with that we can suddenly see and then and same in the sales site so we take that helpful content Google update for example so if that was 20 grand from ad revenue or something like that that was coming in and then you lost 50% of your traffic so if that became 10 and that became 10 so that's only only one part of your business the other stuff still going on suddenly we're 33,000 overdrawn over here and you can start to see just by playing around with all things where's trouble going to be your big wage costs there in week four or sales of half things were in a bit of like let's just say so that 25 they promised that there but actually something happened and we didn't get paid until the following um week so we take that out add on 25 there we're now 56,000 overdrawn in that in that one week so by again by just that's why I don't really link it to anything because trying to predict what's going to happen in the next few weeks is quite subjective and if you put in assumptions around oh these people definitely pay on 30 days or let's assume everyone will pay on 30 days or let's assume I'm going to pay everyone on 60 days actually that isn't what happens in real life so so as I said trying to predict what's going to happen in 13 weeks you may have customers who are paying you on 90 days so in which case you might be able to predict some stuff over here but you know you are able to predict what's going to happen um in the next few weeks but also knowing that has created a problem and I've only got £440,000 available I'm going to go I'm going to go bus because I'm not going to be able to pay my staff even though over the year their picture is far healthier yeah that that mon I can't pay the staff in week eight so so that means I've got eight weeks to make sure that the person who owes me that 25 Grand pays me on time because if they don't my business is going to really struggle so so that's why you know as I I said most um fds or whatever would have a role in 13we cash flow and you know unless you're very cash positive and you don't need to worry about cash um but most businesses yeah yeah but most business you know even if you are you know a wash with cash you would still be a good practice to just keep an eye on and you seen business hasn't even do this in a daily basis sometimes in terms of where it's been that when critical when times are well when covid happened I mean that was you know that that was devastating for a lot of people and and the hardest part was the uncertainty so when they first announced it who knew that you know Furlow wasn't immediately no one knew in advance that that was going to happen if you were in hospitality and Leisure no one knew immediately that there was going to be these rates reliefs there were going to be changes to the vat so actually trying to predict on a daily basis you know what was going to happen and that was you know I've got a business at the moment that I look at and it's what standing orders and direct debits not are going out this week what day they going because if they go out on a Monday knowing what I've got in the bank on at the at the end of that week is no use to me I need to know what I'm going to have in the bank on Monday because I've got standing orders or direct debits going out on Monday yeah and that's for the at the end of the month as we told you paying stuff at the end of the month and then bunch of direct it's going out in the first those two three days can be absolutely critical in terms of managing yeah managing your cash flow yeah so you know the the depends how tight cash is obviously if if cash is very tight the shorter the time scale the better um and and as I say most people would be looking at the first few weeks here you you know you should be able to predict fairly accurately um and then um and then this is obviously as the longer it go goes on there is a bit more guess work because you know if you are getting paid on 30 days or 60 days you don't even know how much you've invoiced to be able but the more you do it the more accurate it'll get Etc and as I say even if you are using zero for things like that is it's just the hassle of integrating with a software to do this is you still have just use a spreadsheet it's quicker it's faster and and it it's just so much more flexible you it and again you're going to be using this a lot if cash is tight and therefore it will be a matter of well I need to I've got to move that payment cuz if they're going to pay me late I've got to pay these people late or I've got to pay the PA late and you know and again with in land Revenue if you they they will give you time to pay and it's a lot easier if it's in advance you know and again it's because you're demonstrating that you are on top of the finances I am going to be able to pay you but I just need some time to pay P you know it's you're more likely to get um to get a positive response from suppliers whether it's hmrc or or leads back to our sort of overall Financial control of just demonstrating this can help you and when those Communications come of saying look you can share this with them that this is what I'm doing Etc and then if people see that it tends to they obviously want their money but it just tends to give them more confidence that you're going to deliver in what you say you are yeah yeah and you know if you were starting out today the first 13 weeks it's obviously all um guesswork and assumptions um but as you do this more regularly and and you've got it and you can demonstrate that what you think is going to happen actually happens then yes if you're going to the bank asking for a loan or if you're looking for um some other form of debt facility whether it's asset Finance or whatever having a longer term plan you know one one year this is what our p&l is going to look like this is what our you know over the year it is Cash generative it's cash positive actually in the short term this is the situation I've got this hole because one of my customers is going to pay us late or you know I'm I'm spending a lot of money on on a refurbishment but I'm I need to you know get that back over time having the shortterm thing there and being able to show that you're on top of it will just give people confidence yeah and in using the spreadsheet there like rows 18 to 42 you can just put in whatever makes sense for your business in there yeah and and yeah the way I've set this up is I've sort of followed the p&l type of headings and then at the bottom what you've got to remember is there are things that are not in your profit and loss account so when the capital repayment of any loan any build refurbishment cost if you pay dividends in our example we had a rent deposit so again that that would go on the balance sheet so the balance sheet items sort of come come here um I've just put them at the bottom so you've got your total cash out and and one of the things I like to do depending how many transactions there are but actually is compare what actually happened last week to what I predicted because especially you think oh yeah well you then go oh I had that rent I didn't pay that so I pushed you know and that's why I said it's quarterly I I know I'm going to have to pay that next week so I can just move it across into that week um so I would generally have a you know a review of what actually happened again because it will help me predict in the future and it's not difficult this is not difficult if you know your business you know exactly what's coming in and out as in spreadsheets is it's not a complicated spreadsheet but just seeing stuff there can make such a difference of just visually seeing where the numbers are going to go and even if you are in a bit of a buy Cashwise seeing how you can move things around have a plan can just settle you down and give you a bit of confidence to to move forward rather than sometimes we all do of you see that big number there of J we're going to be bust in week eight let us throw in the towel is you can work to manage it absolutely yeah absolutely so as I say we'll put the link to the spreadsheet in in uh the description below hope that's helpful let us know in the comments if there are any other aspects of uh of short-term Clash flow you'd like us to cover as always wish you every success with your business and you know what to do with those boxes in the screen I we'll see you over on another video [Music] shortly