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 To Improve Your Sales? Do This One Thing

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I recently ran across an article discussing how some companies are asking one simple question to get an understanding on whether a customer would recommend your product or service.  Referred to as the “net promoter score “, the question asked is the following.

On a scale of 0 to 10 how likely is it that you would recommend us to your friends or colleagues?

High responses in the 9 to 10 range are promoters.  Low responses from 0 to 6 are detractors and responses between 7 to 8 are somewhat satisfied.  This concept was embraced by GE Healthcare who at the time was doing traditional customer satisfaction surveys that only gave vague results.

GE went so far as to not only compile a score but also tie it to a bonus.  However, there are critics of this approach too.  While it is a simple measure some say its simplicity may point people in the wrong direction. My thought is we all need to start somewhere and having an actual metric gets you started thinking about how to make customers your best source of referrals.  Understanding why detractors answered the way that they did can only give you helpful information to become better at what you do.  The discussion with your customers on this question can be of great value that can accelerate your company’s growth.