Posted on January 2, 2023  
by Noel Guilford

Today I’ve another gift for you that will round off our series of challenges about cash and cashflow.

We are living in turbulent times in which maintaining strong cash flow is vital to the success of every business. This means not only knowing your cash position and conversion cycle but being able to anticipate future inflows and outflows of cash.

The way to get this information is to prepare a 3-way cash flow forecast. Today’s gift is my very own proprietary cash flow model that does exactly this (which you can download here) together with its detailed workbook showing you how to complete it with you own data. These are separate files both of which you will need to download.

A 3-way cash flow forecast is a financial model that combines the profit and loss statement, cash summary and balance sheet into one integrated forecast of future financial performance.

A well constructed 3-way forecast allows you to toggle between different scenarios to see how outputs change with different assumptions and conduct sensitivity analysis to key inputs.

The steps to prepare a 3-way forecast are:

  1. Use your most recent actual balance sheet figures as the starting point for your opening balances.
  2. Create a sales forecast for each major category of sales and determine the corresponding cost of sales and other variable costs.
  3. Prepare a summary of overheads and fixed costs.
  4. Identify any balance sheet items such as fixed asset purchases, loans and loan repayments, tax payments and dividends.
  5. Finally, focus on timings and cash flow settings for example the timing of payments from customers, creditor payments, VAT quarterly payments, etc.

Detailed step by step instructions are contained in the accompanying workbook.

So, today’s eight maids-a-milking challenge is to prepare your 3-way cash flow forecast for 2023.

As always, if you need any help just let me know.

PS There is no shortage of cashflow forecasting models online and accessible with a subscription. Most of those freely available aren’t 3-way (which rather defeats their purpose) and those accessible with a subscription usually require a degree in advanced maths to use. Despite its level of functionality the accompanying model can be prepared in 20-30 minutes once you have assembled your data.

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