Go for “contract to cash”+1 month or longer!

How far in the future should you forecast the cash flow of your company?

We know – the usual and boring “it depends” is the right answer. The planning horizon can indeed depend on many aspects such as how large cash reserves do you have, whether you are investing in entering new markets or building new products etc. etc.

But if you run a marketing agency, consultancy, software development firm, construction or architecture firm or any other services business, a useful benchmark is “contract to cash cycle + 1 month” as a minimum.

What’s a “contract to cash cycle”? It is the amount of time it takes for your “average deal” between the moment you sign the contract until you receive the final payment for services provided.

So if it takes ~6 months for your company, you should be forecasting for at least next 7 months.

Why so? Because a cash flow forecast should help you make timely decisions.

If it shows a temporary cash shortage ~2 months from now, perhaps you can fix it by accelerating some of the projects and getting paid sooner. But readjustment of your existing projects is not always going to be enough. Sometimes your forecast will clearly show you that you have to win more business to ensure a stable cash flow.

And if it takes ~6 months from signing a new contract to receiving the final payment (plus sometimes quite a while to secure that new contract) then it is clear you should forecast for at least next 7 months.

And that’s another scenario where Tailwindapp.eu: Simple & Easy Cash Flow Forecasting is much more convenient than a spreadsheet. Your forecast will always start on today’s date and will stretch as far into the future as you need. You can zoom in by client, supplier or project. And your forecast will update itself every time you log in!