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Cash is King - cashflow forecasting

27 Apr 2020 - 14:42 by stuart.vaughan

Why all organisations should pay attention to their cashflow in times of uncertainty

There are many things to consider when running a business, a social enterprise, charity or voluntary organisation. Some are complex, some far reaching, but one thing is essential for all if they are to survive – cash. If you don’t have enough money in the bank at the end of the month to pay your debts, then your organisation can run into serious trouble. This applies at all times, but during the current pandemic it’s particularly important to revisit your cashflow forecast to make sure there are no nasty surprises in store.

Your cashflow forecast tells you what money is expected to come into your organisation, but also, importantly when it is expected, and it balances expected income against expected expenditure. No doubt when first putting all this down on paper – or into a spreadsheet – you were able to juggle the numbers so that everything balanced nicely by the end of the forecast period. But what happens when things change? What if expected income doesn't materialise, or expected costs increase? How much slack is there in the forecast to accommodate change? Your cashflow forecast isn’t just to convince your bank manager or grant funder that you have a viable proposal, it’s also a vital tool for the ongoing management of your organisation – you ignore it at your peril!

I would urge every organisation to revisit their cashflow forecast, to double check the assumptions made when it was first put together, and then to model some possible future scenarios involving likely changes to income and expenditure. How certain is your income during lockdown? If you need to deliver new services to your beneficiaries, or amend how you deliver, does this involve additional costs? Are these costs one-off or ongoing? A revised cashflow forecast will help you manage your resources so there are no nasty surprises around the corner.

Quick guide to putting a cashflow forecast together
A cashflow forecast is an attempt at plotting income and expenditure over a defined period of time. Simply record expected monthly amounts, add them up and check whether income is greater than expenditure. If it is, great! If not, do you have enough money in the bank to cover the difference or do you need to do something to change the expected income or expenditure? Can you get payments earlier that month or reduce expenditure for example?

  1. Be realistic in your estimates of income and expenditure – at the end of the day it’s your tool for managing your organisation so it needs to be reliable. Be realistic too about when income and expenditure will occur. If you have secured a grant for example, use the expected payment date for your records, not the date the funder agreed to fund you. Similarly, if you are trading, don’t use the invoice date for the expected income, but rather the date you expect your customer to pay – are you on 30 day terms or 3 month terms?
  2. Use a time period that is useful to your organisation – this will vary from organisation to organisation and sector to sector, but it needs to show expected cashflow over a reasonable length of time to be of value, but not so long you spend your whole life doing it!
  3. Monitor regularly – your cashflow forecast is just that, a forecast. It’s important you are checking at least monthly (if cash is tight you might need to revise figures weekly) that your predictions are accurate, and if they weren’t, how will that affect the cashflow.
  4. Update regularly – whilst checking whether your predictions were correct, amend the estimates for actual, then add another month to the forecast on a rolling basis – so in month one, project forward to the end of month 6; in month 2, check your estimates for month one, then add estimates for month seven
  5. Model different scenarios – where situations are volatile or particularly uncertain, model a few different ‘what if’ scenarios to help you understand how certain events might affect you. This will enable you to make the necessary preparations in advance rather than trying to do things in a rush just when everything needs doing too.
  6. If doing maths or working with numbers isn’t your thing, enlist the help of someone else. Support agencies such as Macc might be able to help, or point you towards professional support, or the Volunteer Centre might be able to put you in touch with a volunteer to assist.
  7. Be honest – don’t be tempted to make your forecast look better than it is to try and impress, don’t hide unpleasant truths from yourself or anyone trying to help you – if the forecast is going to be useful, you need to include all the available information, not just the best bits!

A cashflow forecast is a simple yet effective – some might say essential – tool to manage your organisation so it always surprises me when I come across organisations that don’t have one! For a quick example of how to put one together and what it might look like, there’s a Macc factsheet to look at: Factsheet 17: Cashflow forecasts and budgets

Have a go - if you’ve never done one before you’ll soon get into the swing of it! Like all business planning tools, there’s as much benefit in going through the process as there is in the final forecast created. Examining your assumptions and checking whether or not you’ve missed anything is as valuable as the final cashflow forecast on which they are based.

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