13-Week Cash Flow Forecast: a Worked Example

Cash in a business under pressure tends to run short in a particular week, not on the last day of a month: the week a payroll, a GST, BAS or VAT payment and a supplier's run fall together, before the customer receipts that would have covered them. A monthly forecast reports the balance on the last day of each month and can show comfortable headroom while the middle of the month runs dry. Weekly columns show the low point, and the low point is what a lender with an overdraft or revolving facility is lending into.

The weekly view also matches how insolvency is tested. In Australia, whether a company is insolvent turns mainly on whether its cash flows will let it pay its debts as and when they fall due, and ASIC's guidance lists overseeing cash-flow budgets and comparing actual results with them among the steps directors may need to take. In the UK, a company that cannot pay its debts as they fall due is deemed unable to pay its debts, and a director who lets it trade on after they knew, or ought to have concluded, that insolvent liquidation or administration could not reasonably be avoided can be ordered to contribute to its assets. In New Zealand, directors must not agree to the company incurring obligations unless they believe on reasonable grounds that it can perform them when required, nor let it trade in a way likely to create a substantial risk of serious loss to creditors. Each makes the forecast the directors' evidence as well as the bank's.

It is a direct forecast: it follows cash, not profit, and is built from the ledgers rather than the budget. Receipts come from the debtor ledger, customer by customer, with each invoice placed in the week it is likely to be paid, not the week it is due. Payments come from the creditor ledger, the payroll calendar, the tax calendar and the lease schedule. Each week the first column is replaced by actual figures and a new week thirteen is added, and a variance report sets forecast against actual line by line. Each variance worth explaining is classed as timing, cash that has moved to another week, or permanent, cash that will not come or will not be saved. In a standstill or workout, the bank commonly makes weekly delivery an undertaking, and some agreements set a permitted variance, negotiated case by case.

An ice-cream manufacturer, constructed for this page like every figure in it, has moved to its bank's workout team as winter approaches. Its overdraft limit is US$2.5m and US$1.6m is drawn. The first forecast, in US$000:

Week 5 carries a payroll, the sales tax payment and a supplier run; week 6 the quarterly packaging order. A forecast that reported only month-end balances would show neither week. Four weeks later the bank has actual figures:

The timing items wash out within a week; the permanent one does not, and it takes the low point from US$100,000 to US$40,000. The bank also learns where the forecasting is weakest: receipts came in 10% below forecast while payments landed almost on it, and the next forecasts are read with that in mind. The responses are the business's to propose and the bank's to accept: deferring part of the packaging order, an instalment arrangement for the tax, which Inland Revenue, the ATO and HMRC each offer on their own terms, or a temporary increase in the limit on conditions.

The 13-week forecast is short-range by design. Beside it a lender reads a longer forecast, usually monthly and integrated with the profit and loss and balance sheet, which tests covenants and whether the business can recover rather than merely survive the quarter. It reads liquidity headroom on the forecast's lowest week, not its last, and asks whether the undrawn facility would remain available if a covenant were breached. Where the bank commissions an independent business review, the reviewer often tests the forecast's assumptions, and a business whose forecasts have been accurate has an easier review.

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It decides whether the facility stays open week by week. A workout officer who sees a low point the business can survive, and a variance record that shows forecasts can be trusted, has grounds to keep lending while a restructuring is worked out. A low point below zero with no plan to close it, or forecasts that miss in the same direction week after week, point the other way.

The forecast also marks a line the bank stays behind. The lender reads it, questions it and sets conditions on its facility, but the forecast and the decisions in it belong to the directors. A bank that starts deciding which suppliers are paid risks being treated as a shadow director, which is why the questions are asked and the answers left to management.

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