Smart cash flow forecasting habit #3: go granular for the nearest 6 weeks
29 March 2023Some entrepreneurs don’t do cash flow forecasting at all, but many of those who do, use weeks or even months as a unit of time in their forecasts.
This is perfectly fine if you are creating approximate forecasts for periods starting 3, 6 or even more months from now.
Such an approach is also fine even for the next month if you happen to have a cash reserve so big that you will still be ok even if all incoming payments stop for the next couple of months. But very few of us have such reserves.
So what’s wrong with forecasting for the entire month as one unit of time if it is a short term forecast you are looking at? Suppose it is 27 March today, you have 10k in your bank account and your April forecast says you will receive 100k and pay others 80k. Sounds good, doesn’t it?
Except…what if most of the 100k of incoming payments will arrive during the last week of April while most of the 80k need to be paid during the first week?
If you use weeks as a unit of time, you will have fewer surprises but still, four days between Monday and Friday can feel like an eternity if you are late with payroll payments…
If your cash flow is tight like for many companies and you don’t want nasty surprises, you have to use days as a unit of time for the next six weeks in your forecast.
Why six? During the next four weeks you will typically receive incoming payments on invoices that have already been issued. And by now you should have a pretty good idea as to what invoices are you going to issue during the next couple of weeks, which usually means you will receive payments 5-6 weeks from now.
We have asked many entrepreneurs who stick to months or weeks – why do you do that? The most frequent answer is “this is how my tools are configured”.
Well, we get it – doing daily forecasting in Excel or Google Sheets is a pain. You have to keep adding columns or rows all the time and need to make sure you don’t forget to copy all the formulas properly. You end up spending more time reconfiguring your spreadsheet than analysing data that it contains.
Luckily there is a better way. Tailwindapp.eu offers a rolling daily forecast for as long a period as you wish. It is a visualisation rather than a bunch of numbers. You see every transaction on your forecast separately and can reschedule it to any other date with “drag and drop”.
As soon as you do that, your forecast gets recalculated and you can see expected cash balance on any future date. Cash flow forecasting can and should be easy!
Try the demo to find out how Tailwind works.
Discover also other habits for smart cash flow forecasting: