Fred Adler was a pioneer of venture capital markets in the US and this is his most famous epigram. He had various others, which some called Adler’s Laws. They all held little regard for the ‘glitz and glamour’ many people like to portray with their business – boozy lunches, flashy offices, glossy brochures, and so on.

What was important to Adler were the things that made the business successful, such as:

  • Being able to generate more cash than was spent; and
  • Having the cash where and when you need it.

He regarded both as vital to a firm’s survival. I find the cash flow forecast the most useful report for the day-to-day management of a business. Unlike most accounting reports that review what has occurred in the past, such as the profit and loss statement or balance sheet, the cash flow forecast is a proactive tool.

I had a client who took three months to compile a cash flow forecast for their business. They wanted to bury their heads in the sand (it would have taken me an hour).

However, once they’d finished, it not only helped them manage their cash flow, but also gave them a much better insight into the business. It showed them the size of the pipeline of sales and debtor receipts they needed to generate each week to cover the cash outflows, and it showed up which creditor payments they needed to try and push out and which debtors they needed to chase.

With their cash flow statement in place, this client had a terrible shock. They realised that they did not have a plan, or the ability, to generate the required cash to cover their outgoings. They needed to make some hard decisions about what they were spending cash on, how they were managing their working capital, and how they could increase and diversify sales income.

Building a cash flow forecast

Most accounting software packages can produce a simple cash flow forecast; however, this should be used only as a starting point.

Here are some questions to ask when building a cash flow forecast:

  • Are all the invoices in the accounting system? (Make sure they are not sitting unopened on someone’s desk, or filed in a drawer or wastepaper basket.)
  • Are the payment and receipt dates reflective not just of the payment terms but of when they are expected to be paid and received?
  • Are all cash items (GST, wages, taxes, superannuation) included?

Put the GST-inclusive amounts in your cash flow forecast and not the GST-exclusive amounts that you have in your financial plan or profit and loss statement.

Don’t include projected sales into the cash flow forecast, but only actual sales. When you only have the cash items you are certain of, you will see the cash flow gap and you can start getting busy working out how to close the gap.

Overlay a risk report

For some clients, I overlay a simple risk reporting tool on the cash flow forecast. It looks at the cash you have today and the cash you forecast to have, say, in 12 months’ time and puts a traffic light system in place.

This is useful for board reporting as the board can quickly assess the level of focus required on the cash flow:

  • Green = all good;
  • Amber = ask management what their strategy is to manage the cash flow; and
  • Red = stop everything and focus attention on fixing the cash flow.