There have been key moments throughout my career which seem as clear today as the day I learnt them but none stick out more than this. I guess it’s because I’ve embraced, lived and breathed that advice from the moment I had it and to this day it governs many of the decisions we make at Optix.
I strongly believe it’s the reason we survived the first five years in business, it was instrumental in getting through the recession after the banking crash and most recently was a daily tool for the senior management team during the early days of the pandemic.
Sometime around the year 2000, when I was just 20, my father impressed on me the importance of having a watertight cashflow forecast. I was so lucky to have his support back then as I’d have been lost without it. I barely knew how to use Excel, let alone create a cashflow forecast (I give ours away later in the article).
In any business there are lots of different things you need to consider when it comes to finances – most importantly your ‘cash flow’, ‘profit and loss’ and ‘balance sheets’.
As a fledgling business there is no more important tool than a cash flow forecast. Quite simply because if your business has no cash flow, then you cannot survive. Cash really is vital to how long you can stick around for. You could have the best product, with the best profit margins, but if you are not getting the money in then you may as well forget it.
OK so cash flow is, as you would expect, the measure of cash coming into and out of your business. It will help you forecast your performance and assist in making important decisions over whether you need to or even can invest in certain things to push your business forward. Any business owner without a healthy understanding of cash flow or how to keep track of your own is destined for problems.
I wanted to make this article super actionable. If you haven’t set up a cash flow forecast then I strongly suggest you open up a spreadsheet now (or download mine) and create one with me. I’m going to help you do this step by step. Obviously you can go into a lot of detail breaking down income and outgoings to suit your business type, but I will give you the basics so that you have a good base to expand on.
So now you have your spreadsheet open the first thing to do is to make a note of the year and horizontally across the top of the page put the months of that year. I measure our cash flow on our financial year (in our case its August to July) as this helps us work out averages for the year when we have completed that fiscal period. Down the left hand side of the months, (in a separate column) you can then set up services and products you offer. Under the month you’re currently in, you can then start to record details on money you’ve actually invoiced (Important *This is money invoiced NOT received). Add in a row at the bottom of this that sums the values above it to give you total invoiced value for that month (Sales Delivered). Now below that create a row called ‘Cash Inflows’.
While you’re forecasting (i.e. the data is not real yet) I advise that you create a cell equation that automatically puts the SUM of the sales values for the current month in 2 whole months later for the cash inflows row (when forecasting this allows for the time difference between invoicing and people actually paying you). This is important because as I mention earlier in the post it doesn’t matter how much you invoice, if you don’t get the money in quickly enough. Obviously when you complete an actual month you can put real values into this ‘cash inflows’ column.
So you’ve now got rows of sales values and cash inflow. You may wish to separate these easily with a heading, in a way that suits you, such as INCOMINGS.
Now we’re onto OUTGOINGS which again you might wish to title.
I find it handy to break down our outgoings by Variable and Fixed costs. So for variables I would have rows for things like (you may have more than these):
Tax and NI
Project Costs (Costs that are only there IF you sell something)
Then list your overheads or fixed costs – This will include things like:
Accounts and Bookkeeping
External Services (consultancy/mentoring etc)
Again, consider your business and which costs are important to you. I find it helpful to have a few more rows at the bottom of the spreadsheet for other costs such as:
VAT payments (only applicable if you’ve included VAT in other areas of your spreadsheet)
It is probably wise to have a contingency row as well which i generally set between 1-5% of all costs above.
At the very bottom of the spreadsheet you should then sum the OUTGOINGS. Finally, create a row which subtracts the outgoings from the in-comings to give you your cash flow for that month.
You should also sum up the accumulation of the years INCOMINGS and OUTGOINGS down the right hand side of the spreadsheet, so you can get a grasp on how the year as a whole looks. This is especially useful when you have a good amount of actual data and want to see a snapshot of your business in any one year. Having a row at the bottom of the cash flow, with actual bank balance figures, will allow you to predict, based on changes in in-comings and outgoings, what effect decisions will have on your available cash. For example, you can easily put in another person's wages and see how this affects the coming year, or perhaps plan what would happen if you were able to increase your sales by 10%. For me this is the real power of a well structured cashflow forecast.
As you move through the year, make sure you update the cash flow from budget (forecasting) figures to actual figures. I find that when forecasting you can use averages for the rest of the year. The more actual data you have, the easier this will be.
Now you have your cash flow setup you need to make sure you review it regularly. We review ours monthly, so we have a really good idea where we are at all times. Please make sure you update and review this as regularly as possible or there is no point doing it.
I cannot tell you just how important cash flow is. When Covid hit back in early 2020 we were able to instantly update our cashflow for every scenario we could see playing out (loss of work / staffing etc). In those first few weeks we shared the cashflow as a Board and made daily decisions based on it. When it came to applying for bank loans, we had everything the bank needed, on the day we made the call. Now we’ve weathered the last 12 months better than predicted our attentions are turning more to investments in the business and once again, this document has sat at the heart of every positive decision we’ve made in this area too.
I’m more than happy to give away a basic version of the Excel Spreadsheet I describe above. This will get you started. You’ll want to adapt it to your own business and make it your own, but it will shortcut the steps above which should save you a couple of hours at least 🙂