Forecasting Cash Inflow: A How-To Guide

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Cash flow is the lifeblood of any business. And forecasting cash inflow from customers? Well, that gives you the ability to truly own your numbers and grow your business.

Building a cash flow forecast includes several components, from customer inflows to the numerous outflows with employee expense, vendor payments, and bank loan repayments.

In this Numbers Coach TIP, we are going to focus on a few methodologies to determine customer inflows and how to forecast them. I have used the following methods depending on the client’s business model:

  • Payment pattern by each customer
  • Sales pattern flow
  • Collection pattern flow

Customer Inflow Forecast Method #1: Payment Pattern by Customer

In this method, we layout by customer the expected timing of when we will bill them and then allocate their payment to the month they have paid based on their history. In this case we are plotting out when each customer will pay during the forecasting period being analyzed. This typically works well when you don’t have a lot of customers and the services or products that you provide to them are recurring.

Customer Inflow Forecast Method #2: Sales Pattern Flow

In this method we layout the forecasted billing based on the period being forecasted (month, quarter, year). Then using our average collection cycle metric, we plot the collection of the sales based on the average cycle length. For example, if it takes on average about 30 days to collect our accounts receivable, then if I plot billing in February for $20,000, then I would show the collection of this amount in March.

Customer Inflow Forecast Method #3: Collection Pattern Flow

In this method we layout the sequence of how much of the billing is collected in subsequent months. For example, January billing we analyze how much of it gets collected in each subsequent month from February through December. In February we might collect 50% of the January billing. Then in March we might collect another 30% of January billing. In April we might collect 10% of January billing. We layout this collection pattern and choose several billing months to analyze and then use the average in our forecasting calculations. This method takes more effort and possibly more time due to the need to dig into the details of your collections.

Whichever method you use, by at least trying to calculate your forecasted inflows, you will gain the knowledge on what works and what does not to fine tune this critical element of your cash flow forecasting. No matter how accurate your forecast, you will gain insights into your business to help you make better decisions.

Want More Cash Flow? Check your Accounts Receivable Cycle

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I sometimes hear from business owners that they are making a profit, but they don’t seem to have positive cash flow at the end of the year. What happened?

Your business may generate a positive net income, but if you aren’t monitoring other key cash flow drivers, then you can find yourself strapped for cash to meet the obligations of the business.

One of those drivers that can cause a lack of cash is your Accounts Receivable (A/R) collection cycle. It’s one of the four pillars that drive cash flow (along with Accounts Payable, EBITDA, and Inventory Days-on-Hand)

Your Accounts Receivable Cycle

Many businesses offer customers the ability to “Buy Now, Pay Later” for their purchases. In other words, they are providing customers a short-term interest free loan to pay for the product or service! If your customer doesn’t pay on time or takes longer than you expect, it can create a cash flow problem in your business.

Monitoring how long it takes for you to collect your accounts receivable is important. The quicker you can collect it, the quicker you get the cash you need to pay your bills and reinvest for your company’s growth.

But how do you measure it? Below is a formula to determine your collection cycle. Keep in mind your cycle will shift weekly, monthly, quarterly, etc… The calculation is merely a “snapshot in time,” but it’s important to know.

Formula:
Annual sales / 365 days= daily sales
Accounts receivable balance / daily sales= days to collect accounts receivable

Example:
$1,000,000 / 365 days= $2,740 daily sales
Accounts receivable $80,000 / $2,740= 29 days

In the above example, it takes on average about 30 days to collect the amounts owed by the company’s customers. If this metric increases from 29 days to 39 days, then the extra 10 days has left the company with $27,400 less cash in their bank account than if they had collected it in 30 days. This is where the business owner could see a positive net profit in the profit and loss statement, but also see that their cash balance has decreased by $27,400.

Know your accounts receivable collection cycle. Calculate it on a regular basis, such as monthly. Identify customers who are consistently not paying on time and determine a strategy to encourage them to pay within the terms you have offered. It can be the difference between positive or negative cash flow!

For more resources to help you measure this important metric, check out our Numbers Coach tools and templates.