Create a Better Cash Forecast for Your Business

with No Comments

elementscpa-create-better-cash-forecast-businessThere’s a reason your car has a huge glass windshield in the front: so you can see where you’re going (not where you went). Your business’ cash forecast has the same purpose: to see and plan where you’re going, rather than steering your business’ future from its rear-view mirror (its historical financials) or worse yet, its bank balance.

A good cash forecast helps you reach goals more quickly, sleep better at night, plus powers critical financial decisions like “Can I afford a new hire?”, “Will a new product be worth the effort?”, “How much can I put into my retirement account this year?”, and more. And with the smart use of new cloud apps, you can be up-running-and-benefiting in no time.


Start with a Well-Designed Profit Model

The “smart use of new cloud apps” is a key phrase — At ElementsCPA, we’re strong believers that “software is not a solution”: no amount of money thrown at computers is going to solve a problem. It’s good design that makes the critical difference, and when it comes to cash forecasts, the design of your business’s Profit Model is at the heart of it all.

What do we mean by “the design of your business’ Profit Model”? Most business owners let their finance categories be driven by their accounting software defaults, or the line items appearing on a tax return, or even the ‘traditional labels’ used for financial statements. We believe this mis-serves entrepreneurs and that the financials should instead be an embodiment of theory behind how the company creates profits (the Profit Model) which in turn is a reflection of the Business Model. It’s this unique approach that we’ve pioneered and embedded in our Elements Foundation™ process and which provides the proper groundwork for a good cash forecast because:

  • Revenue is grouped on your business’ actual value propositions to customers (not generic sales lines)
  • Costs are differentiated between infrastructure, uses of profits, and other critical and practical distinctions (not arcane accounting lingo)
  • And therefore your Cash Forecast is already organized along lines that are more naturally predicted and make sense to you the business owner


Use Good Cash Forecast Software

Once your Profit Model is properly designed, the next question is: “Which software should I use?” There’s the ‘old way’ to do things and many newer options are now available — we’ll share our preferred platform below, but whatever you use we recommend it meet the following requirements:

  • Cloud-based: Modern business isn’t location-dependent and your ability to review or update your cash forecast shouldn’t be either. Plus it makes collaboration, backup, and more all the easier.
  • Automated connection to your books: Forecast predictions will often leverage historical activity, so you need a platform that pulls real-time figures from your real books automatically.
  • ‘Three-way’ forecast calculations: Some forecast software predicts revenue and expenses but doesn’t fully factor (or outright ignores) assets, liabilities, and equity activity. This is a recipe for disaster as you’ll get false confidence from a partial picture (e.g., missing debt paydowns, owner draws, and more).
  • Easy-but-powerful formulas: You don’t want to spend lots of time playing with technical calculations — the platform should give you powerful ways to describe your business without an IT or finance degree.
  • Non-financial input possible: This one is more icing on the cake, but the ability to reference non-financial data in formulas (like newsletter subscribers or number of customers) means you have even more common-sense ways to forecast your activity.

With the above in mind, you can see why some traditional options like Excel are a bad idea: We can’t tell you how many manual spreadsheets we’ve seen go wrong, and when a lot was riding on their accuracy to boot.

Modern cloud apps that play well with the Xero (the accounting platform at the heart of all our financial designs) include Float, Spotlight, Dryrun, Jirav, and more. The tool we’ve chosen to integrate into the Elements Platform: Futrli. Not only does it meet all the requirements above, it also has a great complementary visual performance dashboard tool, report writing, and more. ElementsCPA Members automatically have Futrli integrated into their MyCFO™ package, and if you’re not a Member but would like a 50% discount off the software price, just let our team know and we’d be happy to create access.


Define & Design your Forecast Formulas

With the right pieces in places, it’s time to get down to the nuts-n-bolts of the forecast. A forecast is only as good as the design thinking that went into its calculations. Do it well and you’ll have automated an invaluable tool that will provide you confidence on where you’re headed. Do it poorly and it’ll be a crap shoot that can lead you down wrong paths. It’s a mix of art and science, but here’s some tips from many years of designing these for the entrepreneurs we work with:

Expenses are generally more predictable than sales. Some will follow a pattern of being roughly equivalent to the prior month, or the same month in the prior year. Some move in lock step with other line items or non-financial factors (e.g. user software subscriptions will follow number of employees). Both are easily programmable on our platform.

Compensation can be easiest to capture in one of a few ways: (a) follow prior month, (b) layer employee salaries, (c) upload simple schedule to flow into formulas.

• Things like owner draws, retirement contributions, or other can be input as ‘on-the-fly’ one-offs based on your plans.

Revenues are usually forecasted based on the pricing model of your company: It could flow from website hits, subscription renewals, specific project installments, and more. This is obviously a critical piece and digging into it not only helps improve the forecast accuracy, but often leads to enhancements to revenue strategy as well.

These are the calculation basics and typically our team will create an accuracy metric that lets us know how close the forecast has been coming to the actuals over time: Usually after a couple/three months we’re seeing a strong accuracy level which lets us know the dials are adequately tweaked and we can start relying on the forecast to make the big decisions — That’s where the power (and fun) begins.


Sleep Better & Realize your Future Sooner

Having a real-time cash and profit forecast is critical in today’s market, and with the tools now available there’s no reason any smart entrepreneur shouldn’t have one. Not only will it help de-risk the creative moves you want to make, it will help accomplish them in a better time frame while ensuring you can still fund other priorities.

Existing ElementsCPA Members can activate your own cash forecast as part of your MyCFO™ package, and if you’re not currently a Member but would like to learn more about what our Design Team can do for you, just reach out for your own Coffee Conversation. Either way, it’s time to tech-enable your finances and clarify your path so you can power your entrepreneurial creativity.