how the 13 week cash flow forecast is the answer to your financial worries

How the 13 week cash flow forecast is the answer to your financial worries

Many of us know how it feels to run your bank balance a little close to the wire. It’s a stressful experience. 

One large bill at the wrong time can make life very difficult. The solution is to take a closer look at your finances and the cash moving in and out of your bank account. 

You’ve got to work out when your money is coming in and going out, not just how much. It’s the secret to good cash flow management.

Working this out will help alleviate the stress that comes with running a small business. You might be avoiding taking this closer look because you don’t know where to start. 

Luckily, it’s actually easy to do. A simple, short term forecast is all you need.

It’s not hard and it takes less time than you think. In this article I’ll show you how making a 13 week cash flow is invaluable for small businesses.

It’ll reduce risk in your business, help you make important decisions and give you peace of mind that your finances are safe. 

You’ll wonder why you’ve never made one before!

So what exactly is a 13 week cash flow forecast?

A 13 week cash flow forecast is your map for safely navigating through the next few months. 

It helps you plan ahead and be proactive about your financials rather than reactive.

You need to forecast in weeks to see when your cash is moving within each month. If you just looked at the totals for a month you can’t see the timings of these cash movements which could land you in trouble. 

So, why 13 weeks?

13 weeks, or one financial quarter, is a good balance between accuracy and strategic value

Now, what does that mean?

Any kind of forecasting is inherently inaccurate.

It gives you an idea of what could happen but isn’t a 100% representation of what will actually happen. There isn’t much point in forecasting weekly beyond one financial quarter because the further out you go the more inaccurate your forecast gets.

This doesn’t mean you don’t forecast outside this time range, it just means you’d drop back to monthly forecasting at that point. Weekly detail just isn’t worth the effort for longer forecasts.

On the other hand, creating a forecast shorter than 13 weeks loses it’s strategic value. The shorter your forecast, the less you can see coming up on the horizon.

For example, it’s common in the UK to pay your VAT bill every 3 months. It’s really key to plan your cash around this potentially large payment. If your forecast is too short, it might not include this payment which could catch you off guard. 

Perhaps your business has certain requirements that might make you want to use a different forecast length for short term cash management. However, 13 weeks is a good fit for many companies and is a good place to start if you aren’t sure.

Speaking of getting started, if you are completely new to cash flow forecasting we have beginners guide to cash flow forecasting for startups here.

Here’s an overview of what goes into a 13 week cash flow forecast:

  • Use a simple spreadsheet 
  • 13 columns, one for each week
  • Rows for cash coming in and cash going out. 
  • Rows can be split out further into useful categories for a bit more detail
  • Row for total cash at the bottom (your bank balance)

As you go forward each week, you can replace the latest week column with actual data (or add an additional column for actuals if you want to compare them to your initial forecast). 

Updating your forecasts weekly isn’t all that hard to do once it’s setup. The hardest thing is being diligent and actually doing it. Set a reminder for the same time every week to ensure you do it.

Remember, it’s important not to go too complex with your spreadsheet as errors can occur, rendering your forecasts inaccurate. 

Related: How to avoid making a mess of your cash flow forecasts in Excel

Why timing is so important for cash flow management

I’ve mentioned a few times now that cash flow is all about when cash is moving. 

I need to emphasise how crucial this concept is. It’s possible for a business to forecast being profitable in a period and still go bust

Now, that might sound like it doesn’t make any sense!

However, take a look at this simple scenario:

  • You know you’ve got £10k costs going out this month
  • You predict at least £15k in sales, so you’re safe right?
  • What if the majority of costs hit in week 1 but you don’t receive the income until later in the month?
  • If you don’t have enough cash in the bank, you could run out before the income comes in!

If you weren’t looking at the timing of your bills and invoice payments, chances are you’ll have found yourself unexpectedly in debt. 

What’s more, a customer paying late in this scenario could spell disaster.

Forecasting weekly helps highlight these situations so you can take a more proactive approach to your cash flow: 

  1. Ensuring invoices are paid on time
  2. Discuss alternative payment dates with suppliers
  3. Delaying business purchases
  4. Borrowing if necessary 

Your 13 week forecast is an invaluable tool for understanding risk, staying afloat and taking action.

When you don’t want to use a 13 week forecast

Earlier, I said that a 13 week forecast provides a nice trade-off between accuracy and strategic value, and it does.

It may sound like the 13 week cash flow forecast is the only forecast you’ll ever need. 

This isn’t exactly the case though. 

The thing is,13 weeks is still a relatively short-sighted view of your business’ future. It’s role is simply cash flow management. It’s all about highlighting the actions you need to take just to survive week by week. 

There are a number of situations where the range just won’t be sufficient for your business.  

Let’s take a look at a few of these cases:

  • Financial planning for seasonality
  • Financial planning with investment funding
  • Financial planning around business strategy

Financial planning for seasonality

Many industries, like leisure and tourism, have their sales impacted by the time of year. 

If you make the majority of your sales over a specific time period, i.e summer, you’ll find yourself cash rich in this period. 

However, planning further ahead for these businesses is even more necessary. You’ve got enough cash now but can you survive during the off-peak season?

13 weeks won’t be long enough for you to forecast your off-season and peak season. So, if this is you, you’ll likely need to create a 12 month forecast at least. 

A 12 month forecast will force you to think about saving enough cash for your weaker sales periods. Something you might underestimate if you don’t forecast far enough ahead. 

Financial planning with investment funding

Your cash situation might also be quite different.

If you are an early stage business having just received a large amount of investment, you won’t have any short term cash worries. It might be tempting to skip the forecasting process altogether here but you’ll see that it’s just as important.

As a startup, you’re probably not profitable yet and you might not be for a while. How long is that cash going to last you and will you become profitable before it’s all gone? 

Related: Why burn rates will make you question everything

It’s therefore absolutely crucial to plan further into the future to work out when you’ll breakeven. If it doesn’t look like you can get there before you run out of funding then it’s better to realise this earlier rather than later. 

You may have already created a long-term forecast to receive funding in the first place. So, it’s really important to keep revisiting this forecast and update it as real numbers come in. 

The assumptions you used to base your initial decisions on may turn out to be wrong and need updating. Do you need to change your approach based on what you’ve learned so far?

Longer-term forecasts can help you answer these questions and they might need to be several years in length to fulfil this role.

Financial planning around business strategy

Even if you are an established, profitable business, long-term forecasts are a useful tool. 

They help you make strategic decisions around your ‘big picture’ business goals and objectives. If you are always looking at the short-term then you might make decisions geared around short term gain rather than the long term health of your business.

Taking the time to look at this big picture every so often helps ensure you’re not doing the same thing in 2 years time and stagnating as a business.

Like with a financial plan for investors, you might be exploring your business 3 to 5 years out into the future.

You always need one eye on the bigger picture to make sure that what you’re prioritising in the short-term fits with your grand vision. A vision that might take years to fully realise. 

If you want to read more about the roles different length forecasts take, check out our article on 6 cash flow analysis examples for exploring key business scenarios.

You’ll learn about the different scenarios you can explore when mapping different time periods.

Planning ahead through an uncertain future

So, the secret to good cash flow management is working out when cash is moving and not just how much. Getting caught out by a large bill when your bank balance is at a low point in the month can be lethal.

Forecasting the next few months ahead gives you the opportunity to put plans into place to avoid these stressful situations.

But just remember that 13 weeks is still a relatively short-sighted view of your business’ future. 

There are cases where it just isn’t enough. Consider forecasting monthly with a longer time horizon if that is more appropriate to your business and your goals.

Whichever situation you find yourself in, implementing a cash flow forecast is crucial for any business looking to pick the best path through an uncertain future.

James Beer 22nd October 2019 By
 

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