How to Build a 13-Week Cash Flow Forecast

Introduction

Cash flow is the lifeblood of any business, and managing it effectively is essential for long-term success. A 13-week cash flow forecast is a powerful tool that helps businesses plan and manage their cash flow more effectively. By projecting their cash inflows and outflows for the next thirteen weeks, businesses can identify potential shortfalls or surpluses in advance and take proactive steps to address them. 

In this blog, we will explore the benefits of the 13-week cash flow forecasting model and how treasury professionals can create a 13-week forecast to help manage their organization’s cash flow effectively.

What is the 13-week Cash Flow Forecast Model?

The 13-week cash flow forecast model is a short-term financial planning tool that projects cash inflows and outflows over 13 weeks. It helps businesses predict liquidity needs, manage cash, and navigate short-term financial challenges by providing a weekly view of liquidity over a period of thirteen weeks.

This model enables businesses to anticipate cash requirements, allocate resources efficiently, and address short-term financial fluctuations. 

Uses of a 13-week cash flow model 

The 13-week cash flow model is pivotal for businesses to manage short-term finances effectively. It helps forecast cash needs, optimize working capital, and prepare for fluctuations, fostering resilience and strategic financial management. The 13-week cash flow model offers several advantages for businesses, including:

1. Improved cash management

By predicting your cash inflows and outflows for the next thirteen weeks, you can spot any potential shortfalls or surpluses in advance and take action to fix them. This helps you manage your cash more effectively and avoid any cash flow issues.

2. Increased visibility 

A 13-week forecast gives you a better idea of your cash position in the short term. This knowledge allows you to make informed decisions about investments, expenses, and other financial commitments.

3. Better decision-making

A clearer understanding of your cash position allows for more informed decisions regarding investments, expenses, and financial commitments. This capability helps optimize cash flow management and aligns actions with strategic financial goals.

4. Improved communication 

A 13-week cash forecast can help you communicate your financial position more effectively with stakeholders, like investors, lenders, and other important people. This can build trust and confidence in your business and its financial management.

When Should you Use the 13-Week Cash Flow Forecast Model?

A 13-week forecast is often requested by stakeholders during times of financial strain, but it can also be useful in quarterly financial planning. The 13-week cash forecast model is well-suited for mid-term planning but may not be the ideal choice for long-term planning. For a longer-term forecast, a 6- or 12-month forecast would be more appropriate and accurate.

If your financial forecasts show less than three months’ cash runway, you are in the range where a thirteen-week cash flow becomes useful or even critical. Here’s a list of situations in which organizations should opt for a 13-week forecast.

1. Less than 3 months of cash runway or liquidity issues
2. Difficulty meeting payroll obligations
3. Numerous inquiries from vendors about late invoices
4. Frequent defaults on debt payments
5. Uncertainty around funding large upcoming payments
6. Challenges in accurately predicting cash balances

How to Build a 13-Week Cash Forecast?

Here is a step-by-step guide for building your 13-week cash flow forecast: 

Step 1: Define stakeholders’ objectives

By determining your stakeholder’s goals from the 13-week model, you will be better equipped to build a forecast that meets their needs and provides the necessary insights to drive your business forward. 

For example, they may be looking to improve forecast accuracy, simplify intercompany financial data collection, gain operating cash flow (OCF) visibility, or build reports more quickly.

Step 2: Ensure the integration of data sources

There is a wide range of data sources that feed into your 13-week forecast. Identify these sources and include them in your forecasts. This way, you’ll know which tools you’ll need to connect to your 13-week model. For instance, you connect all your bank accounts to an ERP system, from which you create accurate AR and AP ledgers. These data sources include: :

• Bank accounts
• ERP systems
• Accounts receivable and Accounts payable ledgers
• Financial planning and analysis (FP&A) tools
• CRM tools
• Treasury Management Systems (TMS)

 Effective connectivity is of utmost importance for a 13-week rolling cash flow forecast.

Step 3: Set up your 13-week model

When creating your 13-week forecasting model in a spreadsheet, add two sections: model dimensions and input data. Model dimensions display output data by reporting periods and reporting categories, such as cash inflows and outflows. On the other hand, input data includes both actual and forecasted figures.

To ensure that your forecasting model is effective, you should break down reporting categories into headline rows and line items based on the requirements you mapped out earlier. This will help you create a more detailed and accurate forecast for each scenario, with different headline classifications and granularity.

In addition to the basic reporting categories, there are other headline classifications that you can explore, such as capital expenditure, tax, intercompany cash movements, and debt and interest payments. By including these additional headline classifications, you can gain greater visibility into your financial performance and make more informed decisions about investments, expenses, and revenue-generation strategies.

Step 4: Implement the 13-week model with the team

To ensure the success of your forecasting model, you must get buy-in from all stakeholders involved. This means documenting and communicating the requirements you mapped out earlier and assigning responsibilities to the right team members.

To minimize forecast errors, it is important to collect data promptly and choose a cash flow tool wisely. Define who handles what data and set deadlines for feeding that data into your system. By doing so, you can ensure that the data is accurate and up-to-date, which is crucial for making informed decisions about investments, expenses, and revenue-generation strategies.

Why Should You Automate Your Cash Flow Forecasts?

Per a report by Citibank, 72% of treasurers use online or mobile banking for treasury-related tasks. Automated cash forecasting helps these treasury teams with 100% safe bank integration and manage daily cash forecasts for up to 12 months.

Apart from time savings, here are some reasons why automated cash forecasting is better than manual-based cash forecasting:

1. Seamless integration

Manual cash flow forecasting requires treasurers to gather data from multiple data sources, such as ERPs, TMS, bank portals, and from various teams, such as FP&A, Payroll, HR, A/R, and A/P departments. This process is tedious and error-prone. However, automated cash forecasting supports seamless integration with multiple data sources and automatic data consolidation, minimizing the scope of errors.

2. Real-time access to information

Manual spreadsheet updates increase the turnaround time for reporting, resulting in outdated information when they are sent out to the CFOs. This causes difficulty in making timely decisions. On the contrary, automated cash forecasting helps to capture real-time data automatically and store it in a central repository. Automatic retrieval of data across all entities helps CFOs implement data-driven decisions by reducing the turnaround time.

3. Increased accuracy in cash forecasts

Spreadsheets limit the addition of multiple variables, so specific aspects can’t be tracked while forecasting cash flows. In contrast, automated cash forecasting helps predict customer-specific payment dates accurately by incorporating multiple customer and invoice-level variables. External factors such as raw material price fluctuations and seasonality can also be considered to capture trends for generating an accurate cash flow forecast.

4. Identify variance across multiple entities and durations

The manual process makes it difficult to track variance between forecasts and actuals e. However, automated cash forecasting enables performing variance analysis for various cash flow categories for multiple durations. It also reduces the variance by continuously analyzing past and current results and making adjustments to the forecasts.

How HighRadius Enables You to Automate Your Cash Forecasts?

HighRadius AI-based Cash Forecasting Solution helps you automate your forecasts and achieve up to 95% accuracy with real-time data collaboration and insights.

• Automated data gatheringand consolidation of financial data to get 100% cash visibility and improve reporting to CFOs.
• 100% automated integration with ERPs, bank portals, FP&A systems, and legacy systems through APIs or SFTP, and dashboards helps to gain easy and continuous data access.
• Automatic roll-up of forecasts from local to global levels across various cash flow categories, regions, currencies, entities, and horizons with 98% automated cash flow category tagging to improve accuracy.
• Spreadsheet functionality within the solution allows making manual adjustments to the forecast to account for one-off events.
• The ability to perform variance analysis over multiple cash flow categories, regions, and durations and the drill-down capability to find the root causes of variance help take necessary corrective measures.
• The closed-loop feedback model reduces the variance by using bank statement data and fine-tuning forecasts to boost forecast accuracy.
• Tailored forecasting cadence ensures that the forecasts meet the requirements and goals of a company. For instance, cash deficit companies can forecast daily or weekly to prevent debt, and cash surplus companies can forecast quarterly to invest in business growth. This helps reduce idle cash by 50%.
• The time series algorithm helps capture seasonal trends to maximize profits during peak seasons and reserve cash for off-seasons.
• Customer-specific variables are captured easily for identifying patterns in customers’ payment behavior. Thus, treasurers can easily track complex cash flow categories such as A/R and A/P.

FAQs

1. What is a 12-month projected cash flow?

A 12-month projected cash flow estimates a business’ expected cash inflows and outflows over the next 12 months. This projection takes into account expected sales revenue, expenses, investments, and other cash-related transactions that the business expects to make over the next year.

2. How do I create a cash flow forecast in Excel?

Create a spreadsheet with the following columns – Date, Cash Inflows, Cash Outflows, and Net Cash Flow. List the dates for each week and enter the expected cash inflows and outflows. Under “Net Cash Flow,” subtract outflows from inflows. Then, calculate the total cash inflows, outflows, and net cash flow for the forecast period.

3. How many months should a cash flow projection be for?

A common length for a cash flow projection is 12 months, which allows businesses to plan for the year ahead and identify potential cash flow issues in advance. However, some businesses may choose to project cash flow for a shorter period to focus on the short term and respond more quickly to changes in their cash flow.

4. How often should you do a cash flow forecast?

It is generally recommended that businesses update their cash flow forecast regularly to ensure that it remains accurate and relevant. If they have a high degree of cash flow volatility, they may need to update their cash flow forecast more frequently, such as on a weekly or even daily basis.

5. What is 3-way cash flow forecasting?

Three-way cash flow forecasting is a financial planning tool that considers the interdependencies between an income statement, balance sheet, and cash flow statement. This approach to cash flow forecasting provides a clear picture of a business’s financial position and helps identify potential cash flow issues in advance.

6. What is the 13-week business plan?

A 13-week business plan is a short-term strategic roadmap that focuses on key objectives and actions to be accomplished within a quarter. It helps businesses stay agile and responsive to market changes while ensuring progress towards long-term goals through measurable milestones and regular reviews.

7. How to build a cash flow forecast model?

To build a cash flow forecast model, start by listing all sources of cash inflows and outflows. Project future income and expenses based on historical data or market trends. Update the forecast regularly to reflect actual figures, ensuring accuracy and informed decision-making.

8. What are the methods of cash forecasting?

Methods of cash forecasting include direct methods (based on known cash transactions), indirect methods (using income statements and balance sheet items), and hybrid methods (combining direct and indirect approaches). Each method involves projecting future cash flows based on historical data, trends, and business insights.