Cash runway forecast

Applies to a firm whose profit and loss looks fine and whose bank balance moves unpredictably. Produces the thirteen-week forecast and the decisions it surfaces.

The play

1. Start from the bank balance today, not from the profit and loss. Profit is an opinion about timing and cash is a fact, and a firm can be profitable every month of a year it runs out of money in.

2. Lay out thirteen weeks because that is far enough to act and near enough to be roughly right. Beyond a quarter the numbers are a plan, not a forecast.

3. Put money in by the week it will actually arrive, which means the invoice date plus terms plus how late that client is in practice. A client who has paid at day fifty every time for a year does not pay at day thirty in this forecast.

4. Put money out by the week it leaves: payroll and its dates, contractors, tax, software, rent, anything annual that lands in one of these thirteen weeks. The annual items are what catch firms out, because they are not in the monthly rhythm anyone carries in their head.

5. Run the balance week by week and circle every week it goes below the floor. The floor is not zero. It is the amount the firm needs to not be making decisions under pressure, and it should be written down before the forecast is read.

6. For each tight week, name the cause. It is almost always one of three: a large invoice landing late, two payroll runs in one month, or an annual bill nobody diaried. The cause determines the fix, and the fixes are different.

7. Give the moves in order of reversibility: accelerate a receivable, move a discretionary payment, delay a commitment, draw on credit, and only then anything structural. A tight week identified eight weeks out is an email. The same week found three days out is a loan.

8. Say what the forecast assumes and which assumption breaks it. Usually one client's payment timing carries the whole thing, and knowing which one tells the firm what to watch.

What good looks like

• First thing I check that most people skip: the annual and quarterly bills landing inside the window. Insurance, tax, the software renewal that bills once a year. They are invisible in a monthly mental model and they are what turns an ordinary week into a tight one.
• The mediocre version: last month's revenue projected forward in a straight line. It produces a smooth chart with no tight weeks in it, which is the one result a cash forecast should never produce.
• I know it is right when the receivables are dated by when each client actually pays rather than by the terms on the invoice.
• Second test: the floor was written down before anyone looked at the output, so the tight weeks were not defined after the fact to make the picture acceptable.
• Red flag: no week goes below the floor. Either the floor is too low or money in has been entered optimistically, and both mean the forecast will not warn anybody about anything.

Rules

• MUST start from the current bank balance, not from the profit and loss.
• MUST date receivables by when each client actually pays, not by terms.
• MUST include annual and quarterly outflows falling inside the window.
• MUST define the cash floor before reading the output.
• MUST name the cause of every week below the floor.
• MUST order the fixes by reversibility.
• MUST state the assumption the forecast most depends on.
• NEVER project revenue forward in a straight line.
• NEVER present a forecast with no tight weeks without saying why there are none.