In younger companies, cash flow is typically more important than profitability. Cash is what keeps business owners up at night, what can stop you from trading, and the main reason you might go bust. But this is a complex area that even experienced managers don’t always understand. Let’s take a look at how cash flow affects different types of business and how forecasting can help you make better decisions.
Cash flow forecasting and Xero
Xero handles your accounting very well, but it doesn’t do much in the way of cash forecasting. Yes, you can look at your historic cash, over any period you like, but Xero won’t help you predict what’s going to happen next month, or a year from now.
Without a good forecasting tool, getting to grips with your cash flow is going to be an uphill struggle. You may have been using a spreadsheet to try to predict future cash flow, which can get very clunky once the number of transactions builds up. It’s also very time-consuming because daily changes to your situation have to be inputted manually. One late payment from a client, for instance, and your calculations have to be updated. Just how useful is something like this?
While I agree that cash flow forecasting is really important for a business, let me clarify the kind of forecasting I’m talking about. There are two main types:
- Short-term forecasting focussing on transactions at a granular level
- Long-term forecasting focussing on the overall health of the business
The pros and cons of short-term forecasting
Also known as transactional cash flow forecasting, this may see you targeting cash over the coming weeks at a more transactional level (receipts and payments). This focus is helpful if you’re a startup or very small business with just a few transactions happening weekly and you are planning your incomings and outgoings to keep your head above water.
The problem with this is that it’s impossible to scale. Imagine tracking individual transactions when you have a few hundred a month. To forecast correctly, you’re going to need to assign – for each transaction – your forecast of when they’ll be paid. It’s going to take you a lot of time. If you are still small and short-term forecasting is something you need to do, you can use a Xero add-on such as Float to do this.
As your company becomes more established, you should be doing long-term financial forecasting instead. This approach is a bit different and won’t ever be about a particular transaction or week-to-week predictions. If cash is so critical that one client paying a bill seven days late means you can’t do the payrun, that’s not good financial management. If the business is managed effectively, you should have working capital available so issues like this don’t arise. My rule of thumb is that you should have three to six months of cash resources so that you could cover your costs even if you had no revenue for that period of time.
Our recommendation for long-term forecasting
At Beyond, we use a tool called Futrli for forecasting. It’s a Xero add-on that we’ve used for around three years or so. Once connected to Xero, it will sync every 24 hours to give you real-time insights into your cash flow situation. It will update your management accounts and give you forecasts for the next year, two years, three years – whatever is the right measure of time for your business.
Some data dashboards can be pretty confusing, but Futrli’s data visualisations are very clear. There is a bit of configuration needed at first to see only the data that’s important to you, but once that’s done everything will just update automatically. As long as your Xero is up to date, you’ll be able to run off monthly reports for your board or bank or investors really easily.
These reports don’t need to focus solely on cash, either. You could include forecasts of profits, drill into your main KPIs, and add your insights to turn it into more of a board pack. Futrli’s pricing is reasonable and you’ll replace hours of manual work.
You can use the pre-built templates to get going on various types of reporting: cash flow forecasting, balance sheet summary, financial performance vs budget, or financial summary report. There is also a library of formulas that you can copy and reuse, such as expenses to revenue ratio, operating profit margin ratio, or gross profit percentage. You can also set up alerts and get notified about good or bad news relating to certain key activities within the business (for example, sales hitting €100,000 for the month).
What’s really great about using an automated system like this is that you can also bring together different companies to create consolidated reports. For now, you can’t combine companies trading in different currencies very easily (for instance, if you have a UK company and an Irish company), but this will hopefully become possible in the future.
There are other reporting add-ons for Xero, such as Spotlight and Fathom, so it’s a good idea to take a look at what’s on offer before you pick. None of them does everything, and they each have their pros and cons, so make a list of the features you can’t live without and make your choice that way.
Enterprise Ireland and Local Enterprise Offices are offering lots of incentives to businesses at the moment. In fact, it seems likely that Europe will implement a substantial support package for SMEs now, which will filter down through the national agencies. Supports in the form of soft loans, grants, and vouchers are being made available. See what’s available to you and consider implementing systems and workflows that will have a transformational effect on your business. A good place to start is https://supportingsmes.gov.ie