Cash Flow Forecasting Basics – How to Project the Payment of Accounts Payable
Are you assembling regular cash projections so you truly know where your cash flow is headed?
If not, you should be. Operating your business with current, up-to-date cash projections allows you to understand the ins and outs of your cash position. At the same time, using cash projections allows you to spot problems before it’s too late.
This is part 3 of a 4 part series on cash flow projections, one of the most important pieces of analysis that any business owner can implement to project cash flow accurately.
Part 1 focused on “why a cash budget is important and what it should look like.” Part 2, “Forecasting the Collection of Accounts Receivable” took a look at the various considerations involved in projecting collections of money owed to you.
Here we focus on building a projection for the money you owe other people (vendors and suppliers), accounts payable. This also includes overlaying your anticipated near-term revenue and folding the corresponding, forecasted payables into the projection.
These payables are the costs that are incurred as a direct result of the work your company performs, not including some of your overhead or SG&A, and also not including payroll which will be addressed in the next section.
These costs could include subcontractor costs, materials costs, and other vendor/supplier costs directly related to projects or the direct performance of work.
- For a retailer, this would be the necessary costs for replenishing inventory.
- For a manufacturing company, these costs would include raw material costs, delivery/shipping costs, and any subcontractor costs directly related to production.
- If you are a service provider, these costs might include any subcontractor costs for partners that you have brought in for special projects.
These costs have to be analyzed in a unique manner, because as opposed to overhead costs, these payables are directly related to the product/work you produce and not necessarily based on any definite weekly or monthly schedule.
The first thing you have to do is figure out when you will receive their invoices. Then you assign dates for when you will pay these vendors.
Enter all of these projections out in a spreadsheet, grouped into weekly columns, and you’ve got your projection/forecast for accounts payable. Although it can take a little extra time, it really is a simple task.
Alternatively, you can use average days payable calculations to forecast payments. Using an average is not the most accurate from a week-to-week basis, but over a number of weeks it will give you a good indication.
Next steps for you:
- Figure out who in your business is best suited to start working on this right away.
- Share these articles with them.
- Have them download Cash Flow Clarity for free. Cash Flow Clarity includes far greater detail, sample templates, and how-to’s that will give you all the help you need to get your cash flow forecast up and running.
- Set a deadline for when the first cash flow projections will be complete.
Understanding your future cash flows will free your mind up to stop constantly worrying about how much money is in the bank, and focusing your energies on selling and building your business.
To learn how to effectively manage and get your cash flow under control in your business, download our FREE system Cash Flow Clarity.
In the next installment, we’ll take a look at the remaining steps needed to complete your cash flow forecast.
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