April 11


7 Step Cash Flow Forecasting Plan

By Patrick Millerd

April 11, 2023

cash flow, cash flow analysis, cash flow forecast, cash flow how to calculate, cash flow in a business, cash flow management

Covid-19 bred a devastating cash flow forecasting crisis in small and medium-sized businesses. This shock made many business owners painfully aware of their vulnerability and the importance of cash flow management.

“Two out of five small businesses expect to run out of cash within six weeks, according to a survey. And one in five small businesses say they will run out of cash within three weeks.” writes Timothy Adler

Although this was exceptional, every small business will at some time face a cash flow crisis. While many of these crises are of their own making, there are rare occasions when businesses face these “black swan” events—unexpected events that deal crushing blows to any size business. 

At these times, small business owners face a financial black hole. And resolving this crisis is both scary and urgent. 

As a consequence, every small business owner should heed the lessons they learned at this time 

Here are some steps and ideas to follow during these challenging times. 

Cash Flow Forecasting Action Steps

Setting out may feel like attempting to climb Mt Everest without training or equipment. It will be arduous, and it will require tough decisions.

Step 1: Prepare a Simple Cash Flow Forecast

This exercise is not about bookkeeping or accounting. It is simply about the cash!

It is the business owner’s responsibility. It is not for the accountant!

To start, get an understanding of the big picture by asking and answering these questions:

  • What cash does the business need? 
  • How much money do I need personally? 
  • What cash resources are available in the company? 
  • How much cash could I raise?
  • What resources are available from government and bank schemes? 
  • Are there any expenses to defer? And for how long? 
  • What costs can be cut immediately?
  • Are there any other options? 

Resource: A trusted advisor or friend - when making tough and painful decisions, it’s easier to have someone else to bounce ideas off.

Action: On a spreadsheet (Get your Google Docs example here), detail the unavoidable weekly expenses for the business for the next 4 to 5 weeks.  

Then on to the income. Only include any definite amounts that will be collected (no guesses or wishes!).

In addition to the business, do a personal cash flow analysis.

Now’s the time to prepare yourself for painful decisions and conversations. These are going to be challenging and stressful, so steel yourself.

Step 2: Cutting Overhead Costs

Cutting cuts starts with an analysis of an up-to-date income and expenditure account. 

Then a review of last month’s bank statements - business, personal, and credit cards. Follow this with a check back over the previous two to three months. Also, include any annual payments that may be due in this period. Make sure to include all expenses.

Then to the action.

Over time every business accumulates fat. Now is the time to cut it.

Eliminate expenses like:

  • Subscriptions you don’t need.
  • Monthly services not used.
  • Premium subscriptions or services which have cheaper options.
  • Change service provider 
  • Terminate any service retainers or project-based fees.
  • Bring external services like bookkeeping and payroll in-house. 

Then look for any expenses that you can renegotiate. 

With this exercise, creatively look for every cost-saving option

Resource: For a few helpful tips on effective negotiation, I recommend reading Chris Voss’s book “Never Split the Difference.”  

Action: Visit or make phone calls to negotiate potential savings, renegotiate existing agreements, ask questions and be persistent! 

After completing this step update the Cash Flow Summary with the savings.

Step 3: Cutting Staff Costs

Staff costs are the biggest expense in many small businesses and often have the most savings potential. 

Unfortunately, they are also the most difficult to confront. 

Do this staff analysis without considering the actual incumbents to overcome the issue of personal relationships. Approach it as an exercise of rethinking the business structure. Draw up a revised organisational chart. Analyse every role and define the deliverables or accountability for each position. 

Do some quick research on the market pay rates for people in these positions (consider factors like the location, the size of the business, unemployment in the area and the required deliverables).

With the structure defined, map the existing staff onto the chart. 

At the same time, asking questions like: 

  • Is the position needed? 
  • Are there options to automate?
  • What are the alternatives for getting the required deliverables? 
  • Is the function executed in the most optimum way?
  • Can positions be combined?
  • Does it need someone full-time or part-time? 
  • Is it necessary to be on-site, or could it be remote? 

After completing this exercise, the next thing to do is to review each person’s performance against the revised structure and the requirements of the role. Then compare the salaries for the position with the market levels. 

Being as dispassionate as possible, ask the following questions:

  • Is there an excess headcount?
  • Are people paid more than market rates?
  • Are there under-utilised people?
  • Who are the under-performers?

Several business owners I spoke to clearly saw their businesses had excess staff during the lockdown. This excess became obvious as working with a skeleton staff; the company operated as well as before, with significantly fewer people!

Taking the Hard Actions with Staff

Focus on “What’s the best decision for the business?

The difficulty with dealing with staff is the relationships – many are loyal and hard-working. As a result, there will be waves of emotion when dealing with certain people, but this is the time to make the hard decisions. 

What are the immediate options to reduce staff costs?

  • A blanket reduction in numbers either permanently or for a limited period. 
  • Reducing pay across the board or for specific functions.
  • Deferring or paying any bonuses only when the business can afford them.
  • Introducing short time – reducing the working week with a reduction in pay, or using accumulated leave.

Resource: This is another step where you will need support from a trusted advisor. They are not emotionally invested and will give you a more rational perspective.

Action: Adjust the Cash Flow Summary based on these savings.

Step 4: Suppliers of Goods and Services

Speak to suppliers about deferring or splitting payments, settling accounts with discounts, and coming to new agreements.
Negotiate extended terms. Commit to the ongoing support of suppliers who assist (making it clear that this is not a threat but a commitment!).
Investigate the possibility of holding consignment stocks and only paying for these items when sold.
Get quotes on significant cost items and either switch suppliers or use the lower price as leverage with existing suppliers.
Consider options like those in Step 2 and ask suppliers what they can offer.

Resource: In “Never Split the Difference”, Chris Voss covers many effective negotiation tactics. Another valuable resource is Ramit Sethi’s “I Will Teach You to be Rich”. 

Action: After completing this process, update the Cash Flow Summary again.

Do not let the situation drift. Be proactive, face the pain and have one-to-one conversations. This communication is not through email or WhatsApp but ideally face-to-face owner-to-owner.

Step 5: The Cash Flow Crisis Decision

After making all the changes analyse the Cash Flow Summary and decide whether it’s doable and whether these actions will save the business.
If “yes”, go ahead and make it happen.
If “no”, go through the exercise again and see what else to do to reduce or defer payments or get in more cash.
By this stage, it should be clear whether the mountain is too high and whether you have the resources and drive to make the plan work.
Assuming you find a way forward, move on with the following two steps.

Step 6: Get Cash Fast

Be relentless in collecting any outstanding debts. Customers may be in the same situation as your business, so ensure you are at the top of their “to pay first” list.

Pursue all the possibilities of getting cash in fast: 

  • Online sales or selling into other markets 
  • Sell any slow-moving or excess stocks
  • Identify and convert any redundant assets to cash
  • Collect any outstanding personal or business loans

Step 7: Staff Discussions 

It’s now time to brainstorm solutions to minimise the impact of the staff reduction decision on the people.

What are some options with the excess staff? 

  • Could they be moved to a lower-level, lower-paid position in the business?
  • Can you assist redundant staff in finding another job or building their own business? 
  • Could their role be suited to the gig economy? 
  • Are there other businesses in the area that could use their services on a part-time basis? 
  • Is there any staff eligible for early retirement? 
  • Eliminate any redundant “baggage” the business has been carrying through the good times.

After considering these options, it is time to tackle the final hurdle. 

The difficult one-on-one discussions with each affected staff member – it is important to note that this also is not an email or WhatsApp solution. 

In the one-on-one discussions, and before making any final decision, find out whether they have any ideas, options or suggestions. Have they been planning to leave? 

Action: After completing this process, make any final adjustments to the Cash Flow Summary and start relentlessly executing the plan.

The Final Step in Cash Flow Forecasting

Cash flow management and forecasting are one of the most critical tasks in any business. 

Use this exercise to build the process as an essential element of the ongoing business system. Consider it as the business thermometer to measure the sustainability risk in the business. 

Even if the business appears to have sufficient cash, many situations can accelerate the cash burn and quickly turn a company from safe to critical.

For this reason, as soon as averting the immediate crisis, use the opportunity and the saving to rethink the business. 

All businesses should do this exercise at least annually to reduce risk, increase profitability and build a cash safety reserve.  

If you need any assistance with any of these steps please contact me.

Patrick Millerd

About the author

I support small and medium-sized business (SMB) owners to drive profitability and cash flow, managing the financial health of their business through understanding and using their numbers.
Helping them build a complete management system that puts them in control.

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