{"id":2476,"date":"2017-06-16T13:00:00","date_gmt":"2017-06-16T13:00:00","guid":{"rendered":"https:\/\/brightpearl20.wpengine.com\/retail-kpis-30-day-cash-forecast\/"},"modified":"2021-02-08T06:35:04","modified_gmt":"2021-02-08T06:35:04","slug":"retail-kpis-30-day-cash-forecast","status":"publish","type":"post","link":"https:\/\/www.brightpearl.com\/blog\/retail-kpis-30-day-cash-forecast","title":{"rendered":"Retail KPIs: 30 Day Cash Forecast"},"content":{"rendered":"

The 30 Day Cash Forecast is a <\/span>Retail KPI<\/a> that can be implemented in any business. It\u2019s also a metric that\u2019s often avoided amongst younger businesses, perhaps due to perceived complexity, but more likely because it\u2019s too difficult without a system.<\/span><\/p>\n

In this article I\u2019ll be covering the basics (you seasoned accountants out there, let\u2019s talk <\/span>landed costs<\/a> or <\/span>inventory costing<\/a>!) of what a cash flow forecast is, what it means, and what actions you can take if it\u2019s not healthy!<\/span><\/span><\/p>\n

Cash forecast<\/strong><\/h3>\n

To state the obvious, if you run out of cash, you\u2019re in trouble. You won\u2019t be able to pay your bills, or purchase more inventory<\/a> to sell to bring more cash in. <\/span><\/p>\n

Of course it\u2019s not just about spending, you also need to ensure that you\u2019ve always got enough to cover other overheads, such as salaries. <\/span><\/p>\n

On the flip side, having too much cash can also be potentially damaging, as you could be missing opportunities and getting left behind in the market.<\/span><\/p>\n

A successful business that thoroughly understands its cash flow can confidently spend on growth activities such as marketing or product sourcing, without the risk of missing its bill payments. Being in control of your cash does not simply mean knowing what’s in your bank account at all times. <\/span><\/p>\n

Businesses run on a certain level of credit and payment terms, such as not having to pay your vendor for up to 30 days of receiving inventory from them. Additionally, a lot of businesses also sell on credit, such as giving your customers a 30 day period to pay you for items you\u2019ve just shipped. <\/span><\/p>\n

To know your cash position, you need a good handle on all debt, and when it\u2019s due to be paid.<\/span><\/p>\n

Just like knowing what\u2019s in your bank account, these debts, or Accounts Receivable and Accounts Payable, only make up part of the picture. Sometimes, when you buy things, you\u2019ll write a check or pay by credit card, which means that you\u2019ve committed the cash, but it\u2019s not yet left your account. <\/span><\/p>\n

Your \u201creal\u201d cash balance needs to be tracked separately from the balance in your bank account.<\/span><\/p>\n

To do so, you\u2019ll need a simple cash measurement that you can monitor. This is where a 30 Day Cash Forecast comes in. Of course as with all <\/span>KPI reports and high level metrics<\/span><\/a>, they need to be fine-tuned to your business. <\/span><\/p>\n

But the general idea behind this report is that you record all money thats due from your customers within 30 days, along with all of your debts to vendors that are due within 30 days, and any cash movements that are due to clear. <\/span><\/p>\n

Take the total and add it to your current bank balance to land at your 30 day forecast. <\/span><\/p>\n

Let\u2019s look at an example of this in action:<\/strong><\/span><\/h3>\n

Current cash balance: \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0+\u00a0<\/span>$3,865<\/span><\/p>\n

Money due from customers: \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0<\/span>+ $24,000<\/span><\/p>\n

Money due to vendors: \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 <\/span>– $13,347<\/span><\/p>\n

Vendor checks not yet cleared: \u00a0 \u00a0 \u00a0 \u00a0\u00a0<\/span>– $1,000<\/span><\/p>\n

30 day cash position: \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0<\/strong>$13,518<\/strong><\/span><\/h3>\n

Again, a very simple approach that needs tweaking for your situation. Being a forecast metric, you should always retrospectively judge it\u2019s results on the 30th day – if the forecast was wildly off then you need to amend your formula. <\/span><\/p>\n

A fairly common attribute that gets included is a \u2018Late payments\u2019 buffer, which can cover the variance between the customer debt owed and the amount that was actually received.<\/span><\/p>\n

Analyzing the result<\/strong><\/h3>\n

The 30 day cash forecast is intended to keep you on the safe side of going bust, so technically as long as it\u2019s positive, you\u2019re going to have cash in the bank in a month\u2019s time. In reality, you\u2019ll want to set your own minimum safety margin based on your particular business. <\/span><\/p>\n

Free cash also gives you flexibility to react – imagine if one of your products received great PR but all your cash was tied up in another item on your warehouse<\/a> floor!<\/span><\/p>\n

Since it\u2019s a forward-looking measurement, the trending of the number is less important. <\/span><\/p>\n

To see whether you are gradually headed towards a cash shortage (even though the forecast says you\u2019re going to be fine in 30 days\u2019 time), you simply need to look at the average cash balance in the bank.<\/span><\/p>\n

What actions can be taken to improve it?<\/strong><\/h3>\n

If the number is below zero, you may be heading towards a cash-out scenario, especially if you don\u2019t get payment from all your customers on time. <\/span><\/p>\n

In order to be efficient, you need to operate close to the line \u2013 which is why you need to know precisely where the line is. At the risk of stating the obvious, here are some ways to avoid a cash crisis:<\/span><\/p>\n