How a Cash Flow Forecast can tell you everything.

As an outsourced finance director and complete finance function the first hurdle to overcome when starting with a new client is “How can I understand this business as quickly as I can?”

My initial goal with the client is to be in a position to create a cashflow forecast. A cashflow forecast contains every element of the business that I want to know first and the process behind creating it will give me all the answers as I need (not forgetting i’m left with a ready to go forecast!).

Sales

The first element to map out is sales figures. The questions asked here are “What are you selling?”, “How many product types?”, “How are you physically selling them?” (website, store front etc), “What’s the average level of sales revenue each week, month, quarter?”, “Is there seasonality involved?”, “What are your level of refunds and discounts?”, “How often/how quickly do you get paid for your product/service?”, “Are their taxes involved?” (VAT, import duty etc). “How are you pricing your product/service?”, “Who is in charge of invoicing?”, “How is that information fed to them?”

I’ve learnt about their entire sales process and have been able to map out the next 3 months worth of sales from the answers given here.

Cost of Sales

Next up, direct cost of sales. These questions typically look like:

“Who are your suppliers?”, “What direct costs are involved when selling your product/service?”, “How often are you purchasing?”, “How do you order them?”, “Payment terms?”, “How do you receive them?”, “Do you break this down and correlate this directly to the sale involved?”, “Are the goods/service vatable?”

Again, I've been able to map out the cost of sales element of the business, been able to calculate some KPI’s which we can review afterwards and also clearly see any timing lag of the cash relationship between costs and revenues (very important!).

Overheads

Now we look at the other overheads of the business, all those costs not directly influenced by the sales and purchasing element of the business. 

So here we’re delving into “How much is the rent and when is it payable?”, “How many staff do you have?”, “When are they paid?”, “How much are they paid”?, “What other office costs do you have?”.

Here we get an understanding of the infrastructure of the business involved, locations of offices, staff numbers and roles.

Finance

Next up, we want to know about how they’ve financed their way to this point:

“What loans do they have?”, “How often are payments made?”, “What’s the interest rate charged?” “Has the director had to inject working capital?”

Whilst this list may seem extensive it is by no means exhaustive, there are other elements which can of course be included on the cash flow forecast but these 4 sections give me the quickest way to know so much about a business and allow me to make an immediate impact and create a plan of action.

So in short, the quickest way to know everything is to create a cash flow forecast.

If you’re interested in how a part time outsourced Finance Director can help your business by creating weekly cash flow forecasts check out our packages available.