During uncertain economic times, a cash flow statement is a critical tool for helping small business owners survive challenges that are not only impacting them now, but putting the long-term health of their business at risk.

As entrepreneurs struggle to navigate the complexities of the current economy amid the COVID-19 shutdown, it’s more important than ever to have a deep understanding of how cash is flowing into and out of the business. Entrepreneurs armed with a cash flow statement can see clearly how each decision impacts their business, whether they are entirely or partly shut down.

Meghan Dear, one of the ATB X Managers on the Business Everyday Advice Team, which creates entrepreneur-led programming for small businesses in Alberta, says cash flow forecasting at a time like this is incredibly important.

“This is unfortunately a time when businesses really start kicking themselves for not having already generated something that allows them to look further into the future. The biggest challenge with COVID is there are a lot of moving pieces with it and the static cash flow that you might extract from your QuickBooks doesn’t actually tell you what the future holds,” says Dear.

“You need a way to model the future with different scenarios.”

Using smart forecasting to make critical business changes

For many businesses, effective forecasting can make all the difference between business health and success, in both the short and long term. Some businesses don’t know if they have 10 days of cash left, or two months, or if they’ve got a year because it’s not business as usual. And, they can’t draw from the places they used to draw from in order toget by, like reliable future sales.

Sandi MacGregor, Entrepreneur Strategist with ATB at the Entrepreneur Centre in Calgary, says that to be able to make those critical business changes in this new environment businesses can’t just go with gut instinct, or depend solely on a smart marketing strategy.

“Right now it’s all about cash on hand and your anticipated cash flow. So your business decisions need to be driven by your cash flow systems and your projections,” says MacGregor.

Haven’t forecasted your cash flow? No time like the present

The reality for many small business owners is that they spend so much time working in the business that it’s very hard to find time to work on the business. This means things like cash flow forecasting often get set aside. Challenging times like this not only remind us just how important forecasting is, but also force us to revisit our business forecasts and adapt to new realities. Good cash flow forecasting is an important part of building business resiliency.

“I talk often about understanding how your business works. It’s not just spending money on one end and there’s more money coming out the other. You need to understand what’s happening in the middle. That’s what your cash flow is telling you,” explains MacGregor. “It’s how you turn your investment into future dollars.”

“All businesses are equipped to do this. They have all the numbers. It’s just a question of taking the time and doing the math.”

Dear agrees, saying the biggest challenge for businesses is simply getting started.

The ins and outs of cash flow forecasting

A statement of cash flows is a factual document that captures cash inflows and outflows at a single point in time using transactional details from both your income statement and your balance sheet. A cash flow forecast is a model that allows a company to plan multiple scenarios in the future. It can be as simple as a spreadsheet, which looks at different revenue, operating, staffing, debt and equity scenarios over a period of months.

COVID-19 is making forecasting especially difficult for businesses because it impacts future transactional assumptions from both the income statement (such as revenue, expenses and contra-expenses from government subsidies) and the balance sheet (debt and potentially equity) statements.

Cash flow forecasting best practices

Companies who have built a model that allows flexibility in ‘looking into the future with multiple staffing, debt, revenue and government subsidy program scenarios will be able to make better decisions and build a strategy that gets them through COVID-19.

Here are a few tips for creating a cash flow forecast:

• Use a simple spreadsheet that you can easily adjust yourself. There are several templates for small businesses available online.
• Include at least a couple of months of actuals. This will help identify the various sources and uses of cash (the line items). You may also need to use an “average” for non-fixed expenses and income.
• Refer to your Balance Sheet and Income Statement for help. These can help jog your memory, especially about infrequent or irregular cash inflows and outflows.
• Update every month. Replace your forecast with actuals when the month changes. Then, update your future month forecasts if your assumptions and predictions about the business are changing. Revisit non-fixed expenses that used an average to ensure they’re still accurate assumptions.
• Break down more complex line items, like salaries, loans and credit, cash income sources and things like grants or tax subsidy accruals. Each company is different, so breaking out these categories makes for easier and more accurate cash planning.
• Make working draft copies (or worksheets) that allow you to investigate ideas and options without changing your final version. 

Forecasting through the pandemic

Cash flow forecasting during COVID-19 is difficult because of the uncertain future. Every business has both fixed and variable expenses, and reducing both is critical to improving cash position. It is crucial for a company to be looking at more than a month down the line; three-month, six-month and 12-month forecasting are important to making good decisions.

“A very small business owner or someone who is earlier on in their entrepreneurial journey needs to see what it looks like to actually move through these steps of breaking down their cash flow, and then also understanding how to make it into the five-minute habit every month,” says Dear. “When it’s business as usual, a good forecast is actually just a quick reconciliation.”

Effective forecasting during COVID-19 might include:

• Having an effective understanding of Emergency Wage Subsidies, Work Sharing Programs for laid off staff, loan deferrals, Canada Summer Jobs and acquiring new loans.
• Answering questions like, ‘If I renegotiate my rent, how much time does it buy me?’ and ‘If I defer payments on my loan, what will it cost me in the long term?’
• Modelling worst case, medium case and best case scenarios of business changes due to COVID and its aftermath.
• Modeling business model changes, such as costs and benefits to moving online or to e-commerce, allowing you to be nimble in testing out the numbers game on new ideas or new ways of doing things.
• Knowing when you’ll run out of money.
• Doing a risk analysis on delays in your accounts receivables. If a significant percentage of your customers pay late (or default), you need a way to be predictive about the impact on your finances.
• Costing layoffs and terminations (including vacation accruals and severance costs).

Need help creating a plan? We’ve got you covered. Download our free cash flow canvas.

“Once it’s set up, it’s a fantastic tool for you. The moment that a crisis hits then it’s the tool that you start spending more time on to guide your decisions in a way that takes all of those pieces in the middle into account,” Dear adds.