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Finance

How to work out your small company's cash flow without overcomplicating it

There are two things called cash flow, and mixing them up is why most attempts die in the second week. One is the statement your accountant prepares, which explains where the money went. The other is a forecast on a single sheet, which tells you whether you can make payroll at the end of the month.

The first one looks backwards and it is already in your books. This article is about the second one, which almost nobody has and anybody can build.

There is only one formula

Opening balance, plus what comes in, minus what goes out, equals closing balance. That closing balance is the next period's opening balance, and you repeat. That is the whole thing. Everything else is deciding what goes in each column and how often you repeat it.

What counts as money coming in

Money that lands in the account, on the day it lands. An invoice you issued is not money coming in: it is a promise with a date, and the date that matters is the one your client actually pays on, not the one printed on the invoice.

This is the single most common mistake, and it is the one that makes a forecast useless. If you have a client who always pays three weeks late, put it in three weeks late. The forecast is not there to be fair, it is there to be right.

The outgoings everyone forgets

Monthly costs are easy: everyone remembers rent and salaries. What sinks a forecast is everything that does not happen every month and lands all at once — taxes, the December bonus, insurance premiums, licence and software renewals, the accountant's annual fee, a planned repair.

Write them all down once, with the month they fall in, and spread them across the year as a saving if that helps you sleep. A cost you know about is not a surprise; it is just a date.

Why by week and not by month

A month that ends positive can have two weeks in the red in the middle, and your suppliers do not wait for the month to average out. The monthly view hides exactly what you need to see.

By week, the picture changes: you find out that the problem is not that you have no money, but that it arrives on the 28th and the payments are due on the 15th. That is not a profitability problem, it is a timing one, and it gets solved by talking to people, not by selling more.

How far ahead to look

As far as you can hold up with real figures. Thirteen weeks — a quarter — is the usual horizon, and there is a reason: it is far enough to see a problem coming with time to act, and close enough that the figures are still based on something.

A twelve-month forecast built on guesses is not more foresight, it is more fiction. It is better to have three honest months than a year of invention.

How to tell whether it works

Compare it with what happened. Every week, next to what you forecast, write what actually came in and went out. In a month you will know where you are wrong on a regular basis — almost always the collection dates — and you will correct the forecast rather than your trust in it.

A forecast nobody checks afterwards is a wish. One that is checked becomes, in two months, the most reliable number in the company.

Three mistakes that ruin it

  • Mixing personal and business money. If the same account pays the supplier and the groceries, the forecast cannot work, because half the outgoings do not depend on the business.
  • Counting the tax you charge as income. The tax you collect on your sales passes through your account but is not yours. Treating it as income means spending it, and the day you have to hand it over it is already gone.
  • Forecasting collections on the invoice date. Covered above, and worth repeating, because it is the one that makes a forecast look fine right up until the day it does not.

How to start today

  1. Open a sheet with one column per week for the next thirteen.
  2. Write today's bank balance in the first one.
  3. Add what you expect to collect, on the date you really expect it, and everything you have to pay, including the ones that are not monthly.
  4. Next Monday, write down what actually happened and correct it.

It takes an afternoon to build and ten minutes a week to keep. There is no accounting work that pays back faster.

If your figures are not in a state where this can be built, that is the problem to solve first, and it is the one we usually start with. Write to us and we will take a look.