a 13-week

cashflow forecast

It’s time to have a 13-week cash flow forecast as the central instrument on your dashboard!

When starting to learn how to pilot an aircraft, it’s all about watching what’s going on outside the cockpit or flying by Visual Flying Rules (VFR), learning how to adapt your steering in relation to the horizon. 

But the moment you want to become part of the big boys’ airspace, you have to learn to fly using the Instrument Flying Rules (IFR), which is all about looking inside and trusting what you read off your instruments. It’s a sad fact that many fatal accidents have occurred when VFR-licensed pilots have been caught in Instrumental Meteorological Conditions (IMC) or in the cloud, relying on their gut-feeling and their eyes rather than what the instruments could tell them about the aircraft’s situation in relation to the horizon. Since starting to learn to fly at the end of 2007, I’ve been studying aircraft accidents as part of my training. Every time I read an accident report stating ‘VFR-licensed pilot caught in IMC conditions which led to fatal injuries’, it makes me think. In most cases the accident could have been avoided if the pilot had been properly trained and prepared, and had been using the right instruments.

The situation isn’t much different in the cockpit of a company. The pilot, or CEO, is part of the big boys’ (or (financial) stakeholders’) world and it is his or her job to steer the company safely and successfully in both good and, more importantly, less good conditions. The pilot of any aircraft has a variety of instruments to rely on. The classic ‘six pack’, computerised or not, forms the critical set of instruments. While all six must be scanned continuously, one of them, the attitude indicator, is essential and central. The attitude indicator lets the pilot know the aircraft’s position in relation to the horizon instantly. In a company’s cockpit, the dashboard includes numerous historical and future-looking key performance indicators and reports. However, the central ‘instrument’ here, in my view, is the 13-week cash flow forecast. All top line, cost and other cash items are reflected in this report based on the direct cash-in and cash-out method. It is the only instrument, if properly set up, which tells the CEO instantly how the cash situation will evolve in the coming 13 weeks.

In the many distressed cases in which we are currently assisting companies and banks, the CEO is flying through cloud and, with only visual training, often by the time he or she realises the company is out of control, it’s already too late. The first thing we do is set up a 13-week cash forecast. Although this may sound straightforward and simple, there are often many reasons why management has resisted implementing one in the past. Needless to say, the more obstacles they throw up, the more you know they really need it, and the more you need to push to get the report in place. The moment the first report is available, then the real work actually starts. Line by line, week by week, the report needs to be reviewed, checked against historical patterns, but more importantly challenged on the ‘why’. So many times the ‘why’ question leads either to challenging and useful discussions and insights or to management opening their eyes, realising things can be done differently.

With the help of this simple but effective instrument, we have come across so many real, bizarre and sometimes even inexplicable problems which fortunately we have been able to address, leading to serious cash flow improvements. The lesson here is that an external professional eye is crucial and game-changing. In a recent serious distressed case, we noticed high advance payments by customers for annual subscriptions, followed by rapid forecast cash payments to creditors. However, the cash-out was based on creditor invoices, not on services rendered. By introducing the matching principle, or service-based payments, we were able to avoid an immediate substantial cash-out and by doing so were able to guide our client to remain well within its working capital facility.

The next checks and balances step we take is to bridge the 13-week cash flow forecast to the 12-month rolling forecasts. If there are any! If not, we also set up these reports. As a lot of you will know, these rolling forecasts need to be based on the indirect method. And then, again, the real work starts. Bridging the direct-based cash flow forecast to the indirect-based rolling forecast is what many controllers and CFOs just don’t like. The first problem they flag is the weekly versus monthly reporting cycle. The second barrier they usually bring up is that many rolling forecasts are P&L-based and just ignore balance sheet movements. In fact balance sheets are just not forecast. But this is precisely why we want to bridge the two methods. Cash and balance sheet management is often ignored, but contains the necessary and sometimes surprising elements required for financial survival, regardless of the conditions the company is operating in.

In our view, the 13-week cash flow forecast is a central, but normally a secondary, instrument in the company’s financial dashboard. But this needs to change. The moment you are ‘flying’ in the cloud, look to your instruments: if they are fact-based and well calibrated, they won’t give you a false impression and you can trust them and act accordingly, like all well trained pilots.

I would be delighted to discuss this and any other topics with interested clients or candidates.

Klaas Wagenaar

  • February 13 2015
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