Cashflow forecasting #3 - What are my outgoings?

By Martyn Shiner | July 15, 2019

Introduction

If you’ve read the Manifesto for Business Improvement on this blog you’ll quickly notice that 3 of the 6 “Rules” are related to cashflow.

This is part 3 of the mini series on cashflow forecasting, the previous editions being….

  1. Know your Cash Position where I outlined how to get a handle on what your cash position is now
  2. When will I get paid? dealt with knowing when you will be getting money in from customers

Why so?

If your business is running low on cash there are only two options:

  • borrow more
  • hold up supplier payments

Inevitably it is your suppliers that take up the slack where they supply on credit - especially if you look like you will max out any bank facilities. But faced with a customer (you?) who is delaying payment some suppliers may force earlier payment terms, or even demand up front payment, just when cash is about to tighten.

Therefore, having an accurate forecast of when you will experience a cash shortfall will allow you to manage the situation proactively. By giving your bank and your suppliers a steer that you might be slightly behind with the latest payment, or about to blow your overdraft limit, might allow you some wiggle room to get back on track.

Trade payables

Getting a handle on what you need to pay, and when, is a little more complicated for payables than it is for receivables.

Process purchase invoices in a timely manner

Step 1 is the same as with the Sales Ledger….. processing your Purchase Invoices through the Ledger is critical to knowing what you owe at any one time. If you have a stack of paperwork that is ‘in the drawer’ then any reports you can get from your accounting system that relate to trade payables are going to be meaningless.

It is also important that the terms agreed are recorded against the supplier so that when invoices are entered a due date is calculated by the accounting system.

Committed spend

One area that blind-sides many businesses is that of committed spend. If you’ve raised a purchase order on a supplier, and have agreed terms (price, quantity and delivery), then there is a contract and you have effectively ‘written the cheque’ - if the supplier delivers the goods on-time and in-full to the agreed quality then you are committed to pay the bill.

The best way to get to grips with this thorny issue is to forecast committed purchases as creditors by using the following system:

  • Raise a formal purchase order for everything that is spent by the business - including services - and make sure these orders are properly authorised;
  • Every time goods and services are received by the business record the transaction - in effect ‘book it in’ against the raised order;

If this system is implemented two reports can be produced showing:

  • goods received not invoiced - which is effectively an accruals list of creditors not showing on the Purchase Ledger
  • purchases authorised but not received - commitments made by the business for future spend

In uzERP, both of these reports can be tagged with the suppliers’ payment terms to get a forecast of when the payment will be due. This can then be combined with a payments forecast from the purchase ledger and a fuller picture of trade payables can be built up - especially if your business has call-off orders for materials going out 3 to 6 months.

A complete payables forecast

Unlike debtors (receivables), where pretty much everything is covered in the Sales Ledger, payables are likely to come from sources other than the Purchase Ledger, which tends to record only purchases from trade suppliers of goods and services. So, in order to build up a forecast of total payments, we need the following information as well…

  • Regular weekly/monthly payments
    • Weekly wages/Monthly salaries - the net pay figure which your employees receive
    • Monthly payroll payments - PAYE/NI deducted and pension contributions which are usually paid in the following month
    • Business rates - usually paid to the local authority by direct debit monthly
    • Finance and Interest payments
    • Other standing orders and direct debits - examples might be utility bills, IT support costs and the like

  • Quarterly & annual payments
    • Rent - usually in advance on each ‘quarter day’
    • VAT - at the end of a VAT quarter there will be a balance payable to HMRC
    • Business Insurance
    • Corporation Tax

  • One off payments - usually for capital equipment purchases not covered by a finance agreement

The latter tend to be very lumpy and can have a big impact, but are known fairly well in advance making the job of pulling together a rolling 13 week view slightly easier.

Summary

Working out what you owe, and when it needs to be paid, is probably the most critical part in preparing a workable rolling 13 week cashflow forecast.

Making sure you understand what has been processed, and also what you have committed to going forward, involves getting procedures in place to control purchasing activity as well as reviewing payments that happen on a regular basis. If this is done correctly then a ‘systemised’ forward view of what needs to be paid by week can be pulled together ensuring there are no surprises.

And finally…. if you want to know more about how we can help you improve your business through better systems and improved information then do please get in touch via the Contacts Page.