SCORE Small Business Blog

13 Week Cash Flow, Part 2 – Forecasting the Knowns
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Forecasting sales, revenue, and cash for the next 13 weeks is the most difficult part of the 13 Week Cash Flow Statement for a small business because it is the least certain.  But this task has some easy parts too. The first step is to forecast known revenue and costs – those for outstanding invoices, work in progress, and new work from proposals already submitted.

First, identify the invoiced amounts you have not received yet. Note how much you expect to receive in each week.

Second, consider your work in progress. How much will you invoice for this work? When will you send the invoice, and how much later will the cash payment be received? Your revenue is booked when the invoice is sent, and this shows up on the “income statement” or “P&L Report.”  But for a cash flow statement, the important date (or week) is when the cash comes in. You cannot pay a vendor with booked revenue! You need cash.

This timing difference between invoice and receipt of cash is the most important difference between the income statement and the cash flow statement.

If you expect to pay out additional cash to complete this work in progress, be sure to add that additional expense to your predicted cash outflow for the coming weeks. It is good idea to use separate lines (rows) in your spreadsheet to show the costs for work in progress separate from the costs of new work you have not started yet. In each case, the typical rows would be materials, labor, and subcontractor expenses, any unusual shipping or packaging expenses, and any sales commissions. These are called “variable costs” or “costs of goods sold (COGS).”

Third, consider the future work you know about. You may have already made a bid or proposal, or you intend to. This should be a third set of rows in your spreadsheet. It’s a good idea to use a separate sheet to estimate the revenue, costs, timing, and percent likelihood for each of these jobs; then you can use a summary on your master spreadsheet.

For this future work, you will need to make some realistic estimates. When will the customer decide? Should you assume he will take the price you bid, or will you need to come down a bit? When will you order supplies and when will you have to pay cash for them? When will you complete the job and invoice it, and when will you receive cash from the customer? If there are “progress payments” along the way, how much and when?

The last question may be the hardest: what are your chances for getting each of these jobs? You will multiply each of the revenue and cost figures by this “probability percentage” estimate, making your forecast a more realistic view of the prospects for the business.

The final step is to estimate business as yet unknown. We’ll cover that in the next post. At this point you know the format of the 13 week cash flow statement, you forecasted the revenue and costs for outstanding invoices, work in progress, and likely new work from bids already submitted.

Tom GrayMentor, SCORE Fox Valley
Tom helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), and a SCORE Mentor.
www.SCOREFoxValley.org | SCORE Mentors | @SCOREFoxValley | More from Tom

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Discussion (4) Comment


  1. Kirsten ClarkVisitor

    I agree that this does take time to really dig down for the details, but it’s also well worth the effort. There have been a number of times when my clients take a look at the results and finally understand why a cash flow is such an important tool. I have detailed information on how to set up your own cash flow projection at http://www.smartbusinesscashflow.com.


  2. Rob OskinsVisitor

    Excellent and much-needed article, Tom. Small business owners often don’t consider including a cash flow statement as part of their report arsenal. Unfortunately, the income statement only tells part of the story and the cash flow statement tells the most important story. Owners don’t realize that business can thrive — plenty of work and customers — yet it can be in trouble with poorly managed cash flow.


    • Rob OskinsVisitor

      PS If it’s a struggle to create a cash flow statement — you can hire an accountant to create one for you and show you how to maintain it. It’s worth the expense.

  3. Thanks for the pointers, Tom. Somehow in my business as a professional fine artist, even trying to predict the next 13 weeks seems like an overwhelming task. I confess I typically lay analysis aside before I really complete it. I never know what the next painting will or will not do. I have had clients return years later to purchase a painting they fell in love with, which I still happened to own. Perhaps the time will come when I have a way of determining my own industry with more clarity. More likely from the publishing end (reproductions of various sorts) than from sales of originals, but even then….

 

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