Creating a cash flow forecast is essential to developing a clear business plan, but how can you prepare one if your cash flow is unpredictable? Some businesses are always used to forecasting unpredictable cashflow. Others, have it thrust upon them by a changing environment.

The reality of developing a cash flow forecast is sometimes more complex than theory books make it out to be. However, adopting a few practical strategies can bring you closer to developing a usable cash flow forecast for your business.

 

 

Forecasting Unpredictable Cash Flow Starts With A Budget

The first step to putting the pieces of this puzzle together is to create a budget. Essentially, you want to do this for a period of at least the next 12 months. In Calxa, you could start by using the Budget Factory to build your budget from the actual results of this year or last year. For alternate starting points, review the 5 budgeting methods.

Fine-tune your budget to produce your best estimate of what might happen. Yes, we know there is uncertainty, but we will come to that in a moment.

Above all, it is useful to produce your first budget based on what you think is most likely to happen.

There are some parts of it that will be easy to predict, such as your regular rent and loan repayments. You might get payment holidays on those but that is only in exceptional circumstances.

Isolate elements of your cash flow that are constant. This can include items such as filing fees, bank charges, regular income and expenses.

 

Patterns and Causes

Identify what you think the causes of the unpredictable nature of other elements of the cash flow are; weather, pandemics, periodic variations, interest rates, exchange rates, CPI etc. Establish all you know about these causes.

Then, you might look at past trends. This will help identify patterns that can apply in the future. For example, for every $1 spent on marketing, sales increase by $5. Ask yourself:

  • Is there a correlation between the average temperature each month and your sales?
  • Is there some other indicator that could be useful?
  • Does your income follow the price of gold or the Wheat Price Index?

When you are understanding causes and past trends you may find the Australian Bureau of Statistics, the Bureau of Meteorology and the Reserve Bank of Australia can provide useful insights.

If you can establish these relationships, create Metrics for the underlying data in your budget. You can then use a formula to calculate your income budget. Here, you will need to predict future values. Maybe, check if your industry body already does that.

 

Set Up Different Scenarios

After that, it is time to generate best- and worst-case scenario predictions. Effectively, you will end up with three budget versions – one for each scenario.

  1. Best Case
  2. Most Likely Case
  3. Worst Case

In Calxa, use the Budget Manager to copy your original budget and rename it to suit. Thereafter, edit each one.

With your insights into the causes of their erratic nature, determine how unpredictable you consider them to be. Of course, you do not have a crystal ball, so you can’t determine the absolute correct answer. Instead, what you need to do is apply the scenarios. Then, you can work within the spectrum of the results.

 

Scenario Example to Work Out Unpredictable Cash Flow

Let us look at an example of a business that sells Ugg boots, which the owner has labelled as a seasonal product. They estimate the following:

  • During spring and summer, they believe sales will be low. Say, between 50 and 150 pairs per month.
  • During autumn and winter sales are predicted to be between 500 and 800 pairs per month.

So, a best-case-scenario cash flow has the Ugg boots selling at 150 pairs per month in the warm months, and 800 pairs per month in the winter months. Whilst a worst-case scenario has boots selling at 50 and 500. And the most-likely scenario lies somewhere in between.

Now, let us add an extra dimension which may complicate these scenarios. It is likely that the direct cost of the Ugg boots is affected when purchased in larger amounts. So, if the business sells more, they may indeed generate a higher gross profit.

This means, you need to generate best- and worst-case scenario predictions for each month in your cash-flow template. In effect, you now end up with three cash flows. But Calxa will help you compare them on the Cashflow Scenario Chart. This will help you see the likely outcome.

 

Balancing the Timing of Payments

Once you have your budgets set up, review the Cashflow Settings. Here you need to make sure your timing calculations are right. After that, you can start running some reports to see what the outcome is likely to be.

 

 

Managing Unpredictable Cash Flow

Doing this exercise assists you in preparing for demands on your business cash and finances. Reviewing your forecast periodically, ideally every month, assists you in understanding what is really happening. Managing unpredictable cash flow will show you what factors are really driving your business.

Predicting your different scenarios puts you in a strong position to plan ahead.

  • What will you do if the outcome is closer to the worst case?
  • How will you manage your cash?
  • What funding can you get?
  • If the outcome is closer to the best-case scenario, will that give you the ability to put something aside for a rainy day?

Because one thing we know about the future is that hard times will come again at some point.

 

Once your business cash flow is steady and less unpredictable, you may want to take the next step and consider how to grow your business. See our article on How to Manage Your Cash Flow for Growth.