STEP 7, Consider Cash Flow Forecasting

Why should I do forecast at all?

First of all a forecast can help you with an overview of how your business is running. Is your business running as expected, you should be happy. If not, something probably is wrong. Secondly we get an overview of the need of working capital. Working capital is the amount of money you need to have access to in order to run your business. Very often this is a credit in your bank. If we can reduce the amount, we would be paying less costs and rents. If we do not have a credit, we could probably use the money from some other investments.

What is a forecast?

Forecasting is what it says, predicting your cash flow, in other words predicting your transactions at your bank account balance. The forecasting can be grouped into two groups: short term forecasting and long term forecasting. The short term forecasting does typically have a period of one month, while the long term forecasting will have ½ year or more. In this article we will focus on the short term forecasting.

It maybe sounds a little tricky to predict something, but in this case it is not. Especially if you are using an ERP-system. Most ERP-systems do work with receivables (customers) and payables (vendors). Both receivables and payables are linked to transactions, which represent invoices.

So each time the enterprise receives an invoice from a vendor, the invoice is registered with information who to pay, how much to pay and when to pay. Each time our own enterprise is sending an invoice to any customer, we also register who the customer is, how much he owes us, and when he should pay.

In this simple scenario we now know which incoming payment transactions are expected in the future and which outgoing payment transactions we expect to execute in the future. Depending on your enterprise’s way of using the ERP it is normal to have costs which are not registered in your vendor module. This can be rents, smaller costs for office expenses, fuel expenses salaries and more. This kind of information should be contained in the forecast, but in many cases we will be able to predict those as well. The last information we need now is an updated balance of our bank account.

An example of a forecast could look like this:

This forecast is considered being made on the 2014-09-06, this is where the realized transactions stop.

In our example we do see that our forecast never goes below zero. In this case it is an indication of the fact that we are not using our credit and should consider cancel it and save the costs. Even at 2014-09-10, where we have a lower liquidity, we are not using our credit.

Another information we can see is that in the last 3 days (2014-09-04; 2014-09-05; 2014-09-06) our expectations are higher than our realized balance. Either we do have more unexpected costs or some of our customers are not paying their invoices. This should be investigated a little more. Maybe we do have a problem with some customers here… Do not send further goods, ask him, why he is not paying etc.