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. Part 3 contained an overview of how to project the payment of your accounts payable.
The final step in putting together a cash projection is forecasting the payment of payroll, expenses, capital payments, and the like. Typically, the things that don’t end up on your payable aging report.
Forecasting payroll requires that you plan your staffing needs and budget appropriately. If your business is in a relatively stable environment, you might not have any fluctuation in your payroll over the next 13 weeks. If this is the case, simply plug in your payroll cost for the appropriate weeks.
If your business is cyclical in nature, or revenue levels are anticipated to fluctuate, your payroll costs may not be the same from week to week. If this is the case, you will need to create a basic staffing plan to understand exactly what your payroll costs will be moving forward from week-to-week. Creating a staffing plan requires that you determine what each employee will be paid for each week. You must also consider your billing projections, and adjust staffing needs based on workload, if appropriate.
Now it’s time to move on to the numerous other expense accounts that have to be forecasted. These can include taxes, various insurances, 401k benefits, licenses, rent, vehicle payments, etc. For each of these categories, and for the expense accounts that compose these categories, you need to project what you will pay, for each week over the next 13 weeks. It’s important to again stress that we are not interested in projecting the timing of the expenses for accounting purposes. When we receive the bill, or when we receive the services is of no interest to us for this exercise. All we care about is when we are going to pay the vendor.
Once you have entered all of these projected payments in the appropriate week that they will occur, you’ll have a nearly complete cash projection.
From there, simply add a row at the bottom to show the weekly cash flow (sum of inflows minus the sum of outflows). You’ll also want a beginning cash balance, so that you can accurately track and project your weekly cash balances.
You should also add other pertinent balances, and create formulas to forecast their weekly movements. Common items include accounts receivable, accounts payable, inventory, line of credit balances, etc.
Having this information is critical for running your business effectively. Without it, you’re in the dark.
With it, you’re on your way to a more profitable business, and some peace of mind.
To learn how to effectively manage and get your cash flow under control in your business, download our FREE system Cash Flow Clarity.