Time for Monthly Cashflow Projections

by Adina Luca, September 20, 2019

September is here, things are still looking weird, so now it’s the time to switch to emergency short-termism. In other words, cashflow monitoring on a monthly basis.

We spoke about the particular case of the summer 2019 and the need for scenarios and reviewed projections before for UK small businesses. Whether or not you have done what we suggested previously, or you have a sensible income and expenses projection, you are ready for the next step – cashflow projections.

Before we start…

Cashflow comes after income statement. It is a consequence of profitability and it is affected by it with a lag of about 1.5 months.

A lot of entrepreneurs do cashflow monitoring instinctively – in our experience, they tend to pay more attention to cashflow than to profit and loss. It is the first need when managing a business that has to pay employees – the worry of enough monthly payroll money motivates the mind. Cashflow, however, does not tell you much about the business, as it may look temporarily good and may come down unexpectedly. So, you still need your profit & loss income and accrued expenses projections and actuals to make sure you stay profitable. And cash will follow.

Also, when you rely only on your cash flow information, you may be losing money. Why? Because you will try to fill the gaps by accepting any type of deal as long as it is a deal. You go cheap on things that could have a big impact because you are trying to make a saving. You hire ‘juniors’ and you force your senior staff to spend time doing twice the work – their own and the new person’s while they are learning. Or you don’t pay for a mobile phone for your salesperson. Which is not only demotivating, it is outright counter-productive – those contacts could stay with you when the salesperson is no longer with the company. Your “Cashflow Only” management style has become your biggest enemy.

Why monthly?

Unless you are a retailer or a high-volume business in fast-moving consumer goods, you should be fine with a monthly cashflow projection and actuals in most businesses. You want to monitor things closely enough, but not so closely that it takes more time (and money) to do the monitoring.

If you feel that an entire month is too long, delaying your response, you can try bi-monthly: 1 to 15 and 16 to 31 of the month. You will, however, need to do a bit more work to collect the expenses to fit the two periods and, depending on the number of suppliers you have and the level of detail in your expenses, you may find it rather tedious.

How to do it – Money In

Attention – cashflow money in and out includes VAT!

Take a look at the past 12 months of incoming amounts to calculate how much of your invoiced work (in percentage) is cashed in 15, 30, 45, 60, 90 or over 90 days. Also known as an ageing receivables report, this analysis will tell you that, for example, 10% of income is cashed in 15 days, 20% in 30 days and so on. Use the percentages to model the incoming cash projection for this year.

Don’t use the date of when the debtors were due as reference, although most accounting systems will show that. Use the date of actual cashing in to determine the percentages as it is more accurate.

If you have major accounts that influence the pattern of cashing in, you can also look at the ageing report client by client. If some of your major accounts have not been active in the last 12 months but are now, look at their previous pattern of paying in. If some of your clients are completely new and you don’t have a history of anticipating their paying pattern, use the worst paying client you have as a model.

Always underestimate cash in and overestimate cash out.

How to do it – Money Out

Money out – this is the easy part. Most of your expenses are regular and you can use averages – for example for salaries, office and administrative expenses. For suppliers and materials that go into delivery, you can set a formula based on your profit and loss expenses. For example, you may know that 12% of your revenue is going out for delivery materials – use that to set the cash out for suppliers in the following month.

To determine the tax cash out, you can apply the formula to the incoming projection (for example, we usually assume that the VAT return of a professional services company is close to 17% of the incoming in the previous month as they have few suppliers with VAT– if paid quarterly, apply the formula to the previous three month and payable in the fourth month). You already know when the salary and corporate tax payments are due.

What to monitor – Total Cashflow Monthly

The difference between money in and money out in a month is called net cashflow. Total cashflow is net cashflow plus the money you already have at the beginning of the month. Set the cell format to go red if it is a negative number to warn you that you will be going into your overdraft.

Don’t let it stay in the red and hope for the best. Check which clients you should chase right now and what expenses you can negotiate payments with suppliers to ensure you stay in the black. Get back to it with actuals before the end of the month to see how it changed.

An ideal total cashflow projection is in the black for most of the year and maybe one or two months in the red. It will follow your business seasonality with a lag – if your activity is high in spring, you have an excess of cash in the summer and so on.

If every projected month your total cashflow is in the red, you live ‘hand to mouth’ and you have a profitability problem. If every month total cashflow projected is in the black but exceeds by far your monthly money outgoing, it is time to call a finance advisor and invest some of your surplus (with immediate access to the funds).

How long should you project for?

If you have never done it before, you should do your monthly projections to include at least January 2020. If you do it regularly, you should project at least 6 months in advance, ideally an entire fiscal year. No, it is not impossible if you do your profit and loss projections well and yes, it is time well spent even if the economy is going well. You can do a lot of things with a bit of maths.

When you update your cashflow, you don’t need to keep your initial projection. Your cash flow is important as a projection for the future, not as past information. You should keep your cash flow actuals reports year on year to learn about changes in expenses and in averages.

If you found this article interesting and think that you may need help with setting up a cashflow template, contact us.

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