Fred scratches his head in confusion as he stares at a couple dozen financial documents scattered all across his desk. "I need to build a cashflow forecast for this quarter," he says, "but how do I actually do that?"
Using an example with HVAC business owner Fred, we'll discuss step-by-step how to map cash in and cash out by week, identify the carry number, and set aside reserves during peak months.
Step 1: Map the Money Going Out and When it Goes Out: Fixed Expenses that Hit Every Month
In order to determine a company's cash flow for the next quarter, it's important to document the company's expenses for this quarter. But first, let's define the difference between fixed expenses and variable expenses. Fixed expenses are the expenses that have a monthly recurring cost regardless of whether there is work or not. This includes expenses like rent, utilities, insurance, etc. Variable expenses, on the other hand, are the expenses that are connected to jobs, such as per hour labor, materials, vehicle fuel, etc.
Once Fred documents his current bank balance, $20,000; he documents the fixed payments he has to make over the next 13 weeks: rent, insurance, truck payments, and general office subscriptions.
- Rent: $2,000/month
- Insurance: $350/month
- Truck Payment: $1,250/month
- General Office subscriptions: $250/month
For variable expenses, payroll is due the second and fourth weeks of every month, and he has to pay for the materials of the 10 jobs he's completing this quarter.
- Payroll: $4,600/per period
- Materials: $3,500/per week
Step 2: Map the Money Coming In: Last Two Slow Seasons, Lowest Revenue Months
Next, he documents how much money he's owed for the completed jobs in the next 13 weeks. The following 10 payments should be received during that time.
- Week #1: $5,000
- Week #2: $10,000
- Week #3: $4,000
- Week #4: $8,000
- Week #5: $0
- Week #6: $15,000
- Week #7: $4,000
- Week #8: $0
- Week #9: $8,000
- Week #10: $6,000
- Week #11: $8,000
- Week #12: $0
- Week #13: $20,000
The chart below illustrates flow of cash based on the timing of income and expense during the next 13 weeks:
| Week # | Income | Expense | Cashflow effect |
|---|---|---|---|
| Week 1 | $5,000 | ($5,500) | ($500) |
| Week 2 | $10,000 | ($9,350) | $650 |
| Week 3 | $4,000 | ($4,100) | ($100) |
| Week 4 | $8,000 | ($8,100) | ($100) |
| Week 5 | $0 | ($5,500) | ($5,500) |
| Week 6 | $15,000 | ($9,350) | $5,650 |
| Week 7 | $4,000 | ($4,100) | ($100) |
| Week 8 | $0 | ($8,100) | ($8,100) |
| Week 9 | $8,000 | ($5,500) | $2,500 |
| Week 10 | $6,000 | ($9,350) | ($3,350) |
| Week 11 | $8,000 | ($4,100) | $3,900 |
| Week 12 | $0 | ($8,100) | ($8,100) |
| Week 13 | $20,000 | ($5,500) | $14,500 |
| — | Total: $88,000 | Total: ($86,650) | Total Cash Effect: $1,350 |
"Mind the Gap"
The gap between the money going out and the money coming in is the slow season exposure. In Fred's case, he discovers that by the end of the quarter, he will have improved his cash position by $1,350 leaving him with $21,350 to start the slow season with.
Bringing it All Together
Armed with this information Fred has a clear picture of what his company's cash flow will look like over the next 13 weeks, he can make financial decisions proactively instead of reactively. He reviews the company's subscriptions to see if there are any they can get rid of. Next, he reviews his job pricing and updates all current estimates with accurate material costs and margins. Finally decides to keep his operating balance at $10,000 and put the rest into a business's savings account to cover the expenses for the next quarter.
Call to Action
Open a spreadsheet and list the next 13 weeks. For each, write one number: expected cash in, and one number: expected cash out. The weeks where out exceeds in are your risk weeks.
If you need additional assistance, here's the link to our Slow Season Cash Planner. You can also book a complimentary consultation with Joseph.
Disclaimer: The information in this post is intended for general guidance purposes. For advice specific to your business finances or taxes, consult a licensed accountant or financial advisor.
