A 13 week cash flow forecast is a short term forecast used during liquidity shortfalls to plan a company’s cash flows and avoid financial distress such as missing payroll, defaulting on debt, and ending up in bankruptcy or receivership. Cash flow models, cash flow projections, and cash flow forecasts are shorthand for a 13 week cash flow model. The 13 week cash flow model is a tactical forecasting tool used in business turnaround situations, rather than a strategic business forecasting model used for normal growth management.
If your financial forecasts show less than three months’ cash runway, you are in the range where a thirteen week cash flow becomes useful or even critical. At CFOshare, the 13 week cash flow model is a key element of all our business turnaround consulting services.
When to use a 13 week cash flow forecast.
A 13 week cash forecast is especially useful when business cash flow is unpredictable, cash reserves are low, or the consequences of missing payables are severe. In general, your business should use a thirteen week cash flow model if:
- You have less than 3 months’ cash runway or other liquidity issues.
- You often struggle to make payroll.
- You receive numerous calls from vendors about late invoices.
- You frequently default on debt.
- You have a large payment coming due and are unsure how to pay it.
- You are unable to predict cash balances with accuracy.
How to perform 13 week cash flow forecasting.
A rolling 13 week cash flow model is updated weekly by your CFO, accounting team, and management in a collaborative session. Best practices for cash management using a rolling 13 week cash flow model are:
- Accounting updates the outflow section to include all bills, payroll, and debt service payments. Accuracy is critical in this step.
- The CFO and management meets to review the financial model, identify and remedy short term liquidity issues. Common solutions include:
- Accelerating sales and AR collection efforts.
- Pushing out bill payments to vendors.
- Deferring credit card and line of credit payments.
- Drawing on revolving debt or obtaining new term debt.
- Renegotiating outstanding debt with vendors and lenders.
- Liquidating assets, such as selling real estate in a sale-leaseback scheme.
- Soliciting investor funding.
- Performing a reduction in force.
- The model is updated to reflect management’s solutions.
- The model is reported out to all stakeholders who then execute on the plan.
- The process is repeated weekly.
Cash flow forecasting is an intense and detailed analysis that forces managers to make unpleasant decisions. These decisions are critical to the success of a company in a cash crisis, so a 13 week cash flow model’s success comes from its intense and unpleasant nature.
How to make a 13 week cash flow forecast.
If your business requires cash flow forecasting, you likely cannot afford to risk unnecessary errors. Consider hiring a fractional CFO services to ensure an accurate and functioning model.
Unlike most longer term forecasts, you can and should begin a thirteen week cash flow by using a template. Pick a cash flow forecasting tool that is simple and easy to use – this makes for easier planning than something complex. A 13 week cash flow model should not have complex formulas. The forecasting process requires flexibility, so most values will be hard-coded into the model, allowing managers to push and pull cash events without breaking formulas. This facilitates the best financial planning and decision making.
Cash inflows should be in order of certainty descending. Typically accounts receivable are the most certain inflows, followed by prospective sales, debt funding, and equity investment.
Cash outflows should be in order of magnitude and importance. Payroll is typically the most important outflow, so this should be at the top of your outflow list. Next will be essential expenses and accounts payable bills to critical suppliers and vendors – the kind where if they cut you off your business operations will grind to a halt. Certain inventory purchases may be critical but most can be delayed to reduce working capital. Last will be the many small and replaceable vendors – those whom you can cut off with little risk of disruption.
Adding cell “comments” in Excel (or Google Sheets) is useful to log or report details about a cash event, such as if you are planning to pay a vendor bill 1 month late, or if a customer is disputing an AR invoice. You will be updating the model each week and saving such details as comments will save you time and avoid errors.
Once you have projected 13 weeks-worth of cash events, total the beginning cash balance with the outflows and inflows to calculate a net amount of cash at the end of each week. It is best to use conditional formatting in the report to highlight negative cash projections, major outflows, and other unusual events.
What is a healthy cash flow?
A business’ cash flow is healthy when your cash flow forecasting shows no negative cash positions. At this point it is time to retire the 13 week cash flow model and redirect effort towards growth.
The quality of your cash flow is also an important consideration. High quality cash flow includes:
- Revenue growth
- Increased accounts receivable collections
- Sustainable expense reductions
- Reductions in force
- Debt service reduction and/or debt restructuring
Low quality cash flow includes:
- Increased debt financing
- Indefinitely postponed vendor payments
- Continuous equity investment (e.g. owner contributions)
- Growing but unsubstantiated sales projections
Turning around a business’ cash flows.
The 13 week cash flow model is just one component of a business turnaround. Financial distress is caused by larger strategic issues. These issues may include:
- Underperforming sales or marketing.
- Poor capital structure such as excessive debt, high debt payments, or debt interest.
- Low (or negative) margins undetected due to bad financial accounting.
- Excessive overhead structure relative to gross profits.
- Fraud or embezzlement due to lack of financial controls.
- Lack of routine financial forecasting.
While a 13 week cash flow model is useful for surviving a crisis, it will not solve the long term structural problems. Working with a turnaround consultant to address both short term cash challenges and longer term strategic problems is critical to your business’ success.
Our fractional CFOs can quickly step in to help your business plan its cash and avoid catastrophe. Book an appointment now to learn about our turnaround services and get your cash flow back on track.