In this post, you will learn how to build a 13-week cash flow step by step.
Each section of this post will help you upgrade your business.
So, without further ado, let’s dive into the details.
What is a 13-week cash flow
A 13-week cash flow forecast covers the cash flow of your business for the upcoming 13 weeks, aiding in making financial decisions. When companies face cash shortfalls, they create a TWCF (Thirteen-Week Cash Flow) to manage immediate future situations.
When an organization lacks knowledge about handling cash flow-related issues or lacks a clear view of cash management, they use this method to address problems such as paying expenses, payroll, and managing financial crises.
Sometimes investors request this medium-term forecast to understand the company’s performance in the near future and decide whether to invest.
Using a thirteen-week cash flow, we can anticipate and prepare for future problems, ensuring the organisation is ready to tackle them.
Now, let’s delve into how to build a thirteen week cash flow model.
How to Build a 13-Week Cash Flow Model
Building a 13-week cash flow model isn’t rocket science, but it requires an understanding of how items and concepts work.
Manually or Using Software
You can create a forecast model using either method: manually (direct method) or using software. It’s essential to understand how both methods work.
In the manual approach, you input all information and items into spreadsheets manually. You include actual values obtained from sources and forecast values estimated based on data.
On the other hand, by utilising software, you can connect your accounts and other information sources to application APIs, allowing the software to automatically populate the data in the sheet.
For small businesses with straightforward cash inflow and outflow, go with manually. However, for complex cash flow, using software is recommended. Various tools are available in the market, talking about them later.
First, let’s explore how to build a 13-week cash flow forecast.
Step 1: Define Objective
Defining the objectives of building your cash flow forecast is crucial. Your objectives determine the purpose of creating the model and guiding what actions take afterward.
Common reasons for building a cash flow forecast include:
- Addressing financial crises resulting from events like wars or pandemics.
- Meeting investors demands for transparency.
- Providing a clear payment strategy.
- Analysing medium-term views to enhance cash flow.
Once you’ve defined your objectives, let’s move on to the next step.
Step 2: find out Template
A template is the initial component required for creating your TWCF. You can download my 13-week cash flow template or create one yourself.
Here’s an explanation of the template:
The template consists of two divisions: horizontal and vertical. The horizontal line represents the reporting time period in weeks, while the vertical line represents items such as customer payments and expenses. It includes categories of cash flow, both inflow and outflow. This data is referred to as output data.
Input data can be divided into two parts: actual values and forecast values. Initially, you estimate cash flow figures, and as the time period progresses, update the forecast sheet with actual values.
Step 3: Data Sources
Data sources play a significant role in forecasting. The data used in spreadsheets originates from various sources:
- Business bank accounts
- Enterprise resource planning systems
- Accounts receivable (AR) and accounts payable (AP) ledgers
- CRM tools
Integrating these data sources with your cash flow software and no need for manual entry. Software generally extracts data from these platforms, automatically generating the next 13-week forecast using historical data. The accuracy increases with a longer history. A history of 6 months is a good option.
Step 4: Recording All Inflow
If you’re using software, there’s no issue. However, for manual entry, consider your inflow carefully.
Cash inflow refers to funds coming into your business accounts from various sources, such as customer payments and bonds.
Record all these items in the cash inflow section of your sheet. Estimate the values based on historical patterns. For example, customer payment history helps to forecast next week’s payments.
Certain figures may remain constant monthly. For instance, your rent and employee payroll. Some items are one-time, so consider and include them in the section.
Here’s a list of common cash inflow sources:
- Sales revenue
- Customer payments
- Loans
- Accounts receivable
- Interest income
Calculate the total inflow at the end of the inflow section and note it down.
Let’s move on to the next step.
Step 5: Outflow
Recording outflow is similar to recording inflow, and the process involves calculation as well.
Outflow refers to money leaving your bank account. It can be categorised as operating, non-operating, recurring, or non-recurring.
For instance, funds going into raw material are operating, while funds from buying assets are considered non-operating as they don’t relate with the company’s main core operations.
Certain outflows are one-time, like legal fees or document charges. Others occur periodically, such as annual licence renewals. While salary and rent are fixed values.
Here’s a list of common cash outflow items:
- Payments to suppliers
- Employee payroll (salaries)
- Rent payments
- Loan payments
- Federal Taxes
So, Consider and record figures for upcoming outflows. Estimate how much you’ll pay suppliers, how much loan repayment is due to the bank, etc. Utilise historical data to determine the outflow for each week of the next 13 weeks.
Remember, Prioritise outflows based on their significance and magnitude. Payroll should take precedence, followed by critical expenses like supplier and vendor payments. Afterward, include other expenses that could be possible to delay in case of problems.
Calculate the total outflow at the end of the outflow section and note it down.
With this, we’ve nearly completed our process. Let’s move on to the final section.
Step 6: Net Cash Flows
It’s a simple calculation to determine the net cash flow. Subtract cash inflow from cash outflow, and you will obtain the net cash flow.
Additionally, remember to include the bank balance as the opening balance in the first week. At the end of the first week’s forecast, add the net cash flow to the opening balance, which will give you the closing balance for that week.
The closing balance of the first week becomes the opening balance of the second week, and this process repeats for the next 13-week forecast.
If the net flow yields a positive result, it means the company’s incoming cash surpasses its outgoing cash, allowing the company to use those funds for other purposes.
However, if the result is negative, it indicates that outgoing cash exceeds incoming cash. In such cases, the company’s management team and CFO should work on reducing excess expenses.
TIP: Highlight major outflows, unusual events, and negative flows. This will draw attention and help find solutions.
Step 7: Analyse the Forecast
Now that we have the forecast ready, our first step is to analyse it. Based on this analysis, the management team and CFO can make decisions regarding investments and operations.
Examine the graph of net cash flow. Is it growing or declining? Are there any weeks with negative values? Analyse your estimated customer payments. Are they aligning with your expectations?
After each week passes, replace the forecasted figure with the actual value. This enhances accuracy. If you are performing all these tasks manually, avoid using complex formulas that might complicate your work and introduce the possibility of errors.
When a financial crisis impacts the business or market, the company should be aware of its financial position early on and be prepared to address it, as explained above.
If you’re using forecasting software and have connected your data sources, the actual values will be updated automatically. Otherwise, manual updates are necessary.
Importance of TWCF
The 13-week cash flow forecast is renowned for its versatility. It offers more than one or two uses. Its power lies in transforming a firm’s cash flow and influencing our perspective of the company. It doesn’t just mitigate potential financial problems; it can enhance cash flow, positioning your business favourably compared to others in the same field and attracting investors.
Let’s explore some of the importance of the Thirteen-Week Cash Flow:
High Accuracy
Long-term forecasts are generally less accurate than short-term ones. However, short-term forecasts often don’t provide sufficient guidance for long-term planning.
By calculating on a weekly basis, the 13-week cash flow forecast achieves a higher degree of accuracy compared to longer forecasts.
Medium-Term View
The ability to make tough decisions is a significant advantage of the 13-week forecast. It bridges the gap between short-term models, which may not accommodate significant growth and planning, and long-term forecasts, which can be less accurate and may not align with expectations.
The Thirteen-Week Cash Flow forecast, with its medium-term focus (usually quarterly), empowers decision-makers to navigate with relative ease. The 13-week model strikes a balance between accuracy and timeframe.
Investor Transparency
Undoubtedly, the 13-week cash flow provides a clear view of a company’s financial standing. Investors and stakeholders often demand this forecast for various reasons, such as gaining insight into the company’s position or assessing performance during crises.
Due to its clear insight into company activities and future growth, this forecast builds trust between investors and organisations, promoting transparency and a stronger partnership.
Addressing Cash Flow
The primary reason for developing a 13-week forecast is to tackle cash shortfalls. When a CFO and CEO lack clarity on managing cash issues and understanding where funds are directed, this forecast not only identifies outflows but also offers potential improvements. It facilitates the creation of medium-term plans to address existing shortfalls.
In the event of a financial crisis affecting the business or market, early knowledge of the company’s financial position is crucial, as elaborated above.
Here I included a little section for your help.
Forecasting Cash Flow Tools
Several tools are available for cash flow forecasting. You can explore these options and set them up by reading their respective blogs.
Cash Analytics: This dedicated software offers cash forecast and liquidity management. For a live demonstration, you can contact their team. Here is their cash flow setup guide.
TROVOTA: This software features the ability to create different scenarios, making it suitable for the complex and time-consuming task of 13-week forecasting. You can also request a demo by contacting them.
CFOHUB: 13 week model is itself a tool which identifies root issues and helps to take aggressive steps. But without financial expertise, we may face much resistance. CFOHUB offers financial experts who can handle various activities and provide a comprehensive forecast model.
Conclusion
This concludes our discussion on the 13-week cash flow forecast.
Now, are you ready to create your own model?
Let me know your thoughts in the comment section below.