6 Principles of Accurate Cashflow Forecasting

From Appster co-founder & co-CEO, Mark McDonald


Cashflow is the lifeblood of a business. Ignoring it kills millions of startups worldwide each year. Today, more than ever before, the key to success for startup companies is to get funds coming in as soon as possible while, where reasonable, delaying outgoings. It starts with efficient cash-flow forecasting.

Cash-flow mistakes, such as ignoring it or confusing it with profits, are among the deadliest and most common errors startups make. Often, entrepreneurs only look at profits that equal income less expenses. But not all income represents cash in. For example, if you made a $1,000 sale but the customer hasn’t yet paid you, that’s still income.

Likewise, if you bought supplies that you won’t pay for until the seller bills you, that’s an expense that’s going to impact your cash sometime in the future. That’s why you can be a profitable business and still run out of cash and close the shop.

That’s why businesses forecast their cash-flow. By forecasting and planning your expenditure, you can give yourself the best chance to avoid difficulties and build a financially healthy business. Here’s what to keep in mind.


1. Be Realistic

The most important rule of cash-flow forecasting is to be realistic or even pessimistic. Forecasting isn’t about putting your best outcomes on the paper to feel good about it; it’s about discovering potential pitfalls.


2. Plan Multiple Scenarios

Even if you try to be as realistic as humanly possible, a big part of your forecasting will still be a guesswork. You can’t really know what your figures are going to be months in the future. While you can make predictions based on some metrics you’re having now, there are many unpredictable events in the future such as market crashes and changes of sentiment that will affect your bottom line.

One way to deal with that is to create several versions of a forecast. For example, you can make your best guess and then create one scenario one with 25% higher revenues and another with 25% lower.


3. Remember the Definition of Income and Cost

Another important rule of cash-flow forecasting is to always remember that an invoice is not income, and an expense is not a cost. Cash-flow is about the money that enters and leaves your bank account.

Let’s say the sales of your app skyrocket. Apple pays you within 45 days of the last day of the month, Google, a few days after the end of the month, and any of the Android app markets hold money for up to 30 days after the end of the month. This means you’ll have to wait 2 months until you have all that money to play with.


4. Include Every Item

Another key rule is to get into the habit of including absolutely everything, and never compromise. Small expenses may appear too trivial to worry about but if you add them up over the course of 12 months, the final figure might tip you over the edge.

That’s why you want to include absolutely everything in your forecast. If in doubt, throw it in anyway. It’s better to have accounted for an expense and not have to pay it than vice versa.


5. Factor in Fixed and Variable costs

When you separate your costs into different categories, take some time to think about which are fixed and which are variable. Things like rent or broadband bills will remain the same the whole year, which makes the forecasting little bit easier. But other costs may change over time. For example customer acquisition costs may go up or things like electricity bills may vary seasonally – so factor these changes into your cashflow forecast.


6. Plan for Seasonality

An important function of a completed cash flow forecast is to help you identify seasonality in your business and plan your finances accordingly. If the majority of your revenues happen at a particular time of year (e.g. beginning of the year when companies plan budget), a cash flow forecast will help you plan your expenditure for the portion of the year when your income is lowest, and allow you time to put contingency plans in place should your cash-flow look unhealthy.


*Catch Mark speaking at Kick.Start.Smart. Brisbane & Melbourne*

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