The Ambitious Bookkeeper Podcast

65 ⎸ Cashflow Forecasting Basics

September 14, 2022 Serena Shoup, CPA Episode 65
The Ambitious Bookkeeper Podcast
65 ⎸ Cashflow Forecasting Basics
Show Notes Transcript

In this episode you’ll hear:

  • Why Cash Flow Forecasting is important
  • How to get started
  • How to go deeper on this

Thanks for listening. If this episode inspired you in some way, take a screenshot of you listening on your device and post it to your Instagram Stories and tag me, @ambitiousbookkeeper

For more information about the Ambitious Bookkeeper Podcast or interest in our programs or mentoring visit our resources below:

Visit our website: ambitiousbookkeeper.com

Follow the Blog: ambitiousbookkeeper.com/blog

Connect on Instagram: instagram.com/ambitiousbookkeeper

Connect on LinkedIn: Linkedin.com/in/SerenaShoup

Connect of Facebook: Facebook.com/serenashoupcpa

Thank you for your support of our show. If you haven’t left a review yet it’s super simple. Please go to: https://www.ambitiousbookkeeper.com/podcast and leave your review.

Podcast Publishing Tools

[00:00:00] Welcome back to the Ambitious Bookkeeper Podcast. I am coming at you today with a solo episode all about cash flow forecasting basics. This is inspired by a question from someone in our community. Wondering how to start providing cash flow forecasting for a client that's requested it. I've gotten this question quite a bit over the years, to be honest, so I'm sure some of you listening 

[00:00:25] might be one of those people who has this question. So I'm going to cover and go over exactly what cash flow forecasting is, why it's important and helpful and how you can get started without any fancy apps. So if you're ready, keep listening, and I hope you enjoy.

[00:00:45] 

[00:01:14] So what is a cash flow forecasting? Simply put cash flow forecasting is figuring out how much cash you will need or end up with at a future date based on a few different factors: your current actuals, like invoices and payables that you know about, future expectations like sales and purchases you expect to come down the pipeline, and trends, making estimates based on what has happened in the past. So I'm gonna pause right here and ask you, I should have at the beginning. I'm gonna say, go ahead and get out a pen and paper so that you can jot these down. I'm gonna go over them again. These three things: current actuals, like invoices, payables and things like that, that you know about, future expectations, like sales and purchases, you expect to come down the pipeline. So this is a really big key factor in having an accurate cash flow forecast. And then trends making estimates based on what has happened in the past. 

[00:02:18] Okay. So we'll get into these later in the how to but, why is cashflow forecasting important? Especially now with things changing by the moment in our economy, business owners need to be able to plan, but there is more that goes into cash flow than what is on your profit and loss statement. So a typical budget may not always suffice. Think things like debt payoff, sales tax payable, and other balance sheet items that don't hit the P and L. It's also important for industries that operate with credit terms. When customers get invoices later for services or product. 

[00:02:57] Whether this is something a client has asked you to do, or if it's something that you're looking to add to your service offerings to increase your value, don't worry. I've got you covered and you don't need a fancy app or a tool, especially if it's a simple business. You just need to know all the moving pieces which we're covering today. 

[00:03:15] So, what are those moving pieces? Let's talk about how to set a cashflow forecast using Excel or Google sheets. I like to list out the moving pieces and brainstorm where I'm going to need to pool the information from. If your client is a service organization with accounts receivable, it's pretty simple, but the more complex the business, the more complicated it can get. For example, if they use purchase orders, pay vendors or product net 30 or net 45, plus they might have some inconsistent sales and fluctuations, or have debt payments, it's a little more work. Okay. Like it's a lot more work. You just have to understand their business and get the whole picture. It's important to utilize an accounting system first to enter all of the bills due and receivables and reconcile the bank account or match the bank feeds before you can prep the cash flow. 

[00:04:10] So here are the steps. If one thing doesn't apply, go ahead and skip it and move on. But I'm going to assume that you have access to Xero or QBO to be able to run some reports as well as access to the bank. 

[00:04:24] So Number One: you want to enter all the invoices? So you are gonna look at your accounts receivable and then you're going to also enter all the bills, your accounts payable with accurate due dates. <laugh>. So if the business owner hand-writes checks and you get them later, you need to know as soon as they are written and enter them into the accounting system. 

[00:04:45] Number Two: You'll then match your bank feeds or reconcile the bank account so that you know what your outstanding checks and deposits in transit are. 

[00:04:54] Number Three: You will decide on how far out you want to forecast the further out you're looking. The more things could change. I like to do one week and two weeks out when looking at cash requirements for accounts payable. And if you're forecasting cash based on a budget, you'll probably look out months or even to the next year. For the purpose of this demonstration, though, I'm just gonna do a one or two week forecast. Then 

[00:05:19] Number Four: You will pull the current bank balance, and put it at the top of your spreadsheet. 

[00:05:25] Number Five: you will deduct your outstanding checks and add back your outstanding deposits. So this is where you're going to check to see if there are any outstanding checks. Or valid undeposited funds, meaning there are deposits in transit. 

[00:05:43] And then Number Six: you are going to add back in. So we've started with our current bank balance at the top of your spreadsheet. You've deducted your outstanding checks. You've added back to that current bank balance your outstanding deposits, because you're expecting those to come in. And now we're going to add in our AR aging. So you'll look at your receivables that will be due in the next seven days and 14 days. And keep in mind if customers pay on time or late, because that will impact your cash flows, this will also give your client a push to collect those past due accounts if they need more money. 

[00:06:20] Side note, they should be looking at this weekly. If cash flow is an issue. Which also means the record keeping needs to be done on a weekly basis so that they have an accurate picture. <laugh>. 

[00:06:31] Next you will deduct from this running total the AP aging. So same thing. Look at your bills that will be due in the next seven to 14 days, and then you put those in as a negative to reduce your future cash flows. Next, if your client has purchase orders, That have not been received or invoiced. So if they use a purchase order system, you want to check to see if there are any purchase orders issued that have not been invoiced by the vendor, and that would be due in the next couple of weeks. After that you're going to add back the pending sales orders. So kind of the same thing. If your client uses a sales order system, this is going to track orders that are coming down the pipeline that aren't invoiced yet. This would be important for a drop shipper or for services that they haven't created invoices yet, and this is usually a conversation with the client, or having access to their sales order system.

[00:07:32] I used to have a client on something called Sin Seven, and I would look at their open sales orders because this would indicate that these are orders that have not shipped yet. So they haven't been invoiced, so they weren't in QuickBooks, but we knew that at some point in the near future, they would be. So that affects the future cash flows if we can expect to invoice those. 

[00:07:55] Next you will reduce this balance again, further, by any recurring expenses that you have. So this should be the easiest thing for you to pull. You're gonna run the P and L for the last month or two and by week on cash basis. So you can see what their average, weekly, non-bill expenses are like software subscriptions, bank feeds, payroll, et cetera. And then if they have any payables on the balance sheet, you want to reduce that balance with those. So. They're usually aren't too many for simple businesses, so I'm just gonna give a couple examples, but this list is not all inclusive. So make sure you look at the balance sheet for your client to see what obligations are specific to them. 

[00:08:38] So one might be sales tax payable. You'll look at your sales tax due to date on the balance sheet, and include this if it's gonna be due in the next week or two, and then payroll liabilities. If your client is using something like Gusto or a payroll provider that withdrawals the payroll taxes immediately when payroll is run, they shouldn't have any payroll liabilities on the balance sheet. But if they do you'll look at your payroll tax liabilities due on the balance sheet and include this if they are going to have to pay in the next week or two, or however Far out you're doing this cash flow forecast. 

[00:09:14] Income tax payable. If there is sole proprietor this is not going to be accrued on the balance sheet. So what we like to do is we set up a separate savings account and have the client frequently transfer percentage of sales over there, so we don't have to worry about this on the forecast. But if they don't have this accounted for, even though with an LLC, that LLC is technically not the one paying the income tax for the owner, you might want to still add this into a forecast for them so that they are thinking about this. 

[00:09:46] Loans and credit card payable. So you'll look to see when loan payments are due, or run a cash flow statement for the month, by week again, to see when they typically pay their debts. And then you'll also, like I said, make sure you're allocating something for savings, or owners draws distributions if they are not on payroll. Cuz that's still affects their cash, they don't wanna skip that. And then lastly, you're going to sum it all up by week or whatever period that you're doing your cash flow forecast by, and if the total is a negative, then your client needs to start collecting faster, increase prices, cut costs or make more sales. Likely it's going to be a combination of all the above. 

[00:10:32] So it's kind of difficult to verbally explain the cash flow forecasting process. So I do have this on a blog. You can go to ambitiousbookkeeper.com/blog/cash-flow. <laugh>. I'll link that in the show notes as well. And I have a visual of the cash flow forecast spreadsheet showing you what's an in and what's an out. So plus and minuses and all that good stuff. If you use something like Xero, they do have a short term cash flow tool. QBO has something similar, but I've honestly found that you still have to do so much conversation with the client, and digging into the numbers and making sure everything is there. Sometimes it's just easier and quicker to actually put this together in Excel or Google sheets. 

[00:11:24] So, like I said, head over to the blog to see all of this kind of in a visual, listed out format. And if you want to dive deeper on cash flow, forecasting, budgeting, advising businesses on how to handle these types of things, we are starting another cohort of Elevate, which is where I teach all of this in a hands on environment. So over the course of four weeks, we meet weekly for two hours. We do a lesson for an hour, and then we do some hands on back and forth instruction on all of these topics, cash flow, forecasting budgeting, meeting with clients, overviews of their financial statements, analyzing financial statements, advising for growth, increasing their profits and things like that. And so if that's something that interests you, please head to ambitiousbookkeeper.com/elevate to get on the wait list for the next cohort. We begin in October. And like I said, it's four weeks only. We meet for two hours every week. We have a group Voxer, so you have a support in between the calls and you get access to the replays for life. And there's lots of resources and downloads and worksheets included in this as well to help support you in this journey of offering these services to clients. So head over to ambitiousbookkeeper.com/elevate. Like I said, we begin in October. If this is something you want to start offering your clients and you don't have any training on this yet, this is where you should start. So I hope to see you there. I'll talk to you next week. 

[00:13:05] 

Podcasts we love