Embark on a journey to financial savvy with the help of CPA Michelle, who brings her expertise front and center to the latest episode, where we unravel the secrets of cash flow forecasting. This isn't just another financial advice session; it's a deep dive into transforming yearly budgets into actionable monthly plans. Discover how to anticipate the ebb and flow of your business's finances, learning to read the signs of incoming revenue and imminent expenses. Michelle's wisdom on the nuances of payment terms and customer payment history sheds light on the crucial difference between the cash you have and the sales you've invoiced, a distinction that could make or break your fiscal strategy.
As we move through the conversation, the spotlight turns to the art of managing your cash flow with a finesse that extends beyond the standard Profit and Loss statement. We tackle the often-overlooked balance sheet wonders, from crunching numbers on equipment investments to loan repayments. Here's where the rubber meets the road—we talk about the shortcomings of conventional accounting software and the power of a well-crafted template to keep your cash tracking on point. Remember, it's not about nailing it on the first try; it's about learning from every twist and turn. By the end of our talk, you'll walk away with the tools and confidence to fine-tune your financial forecast like a pro.
This program is brought to you by:
Balanced Virtually
Be sure to visit BizRadio.US to discover hundreds more engaging conversations, local events and more.
Embark on a journey to financial savvy with the help of CPA Michelle, who brings her expertise front and center to the latest episode, where we unravel the secrets of cash flow forecasting. This isn't just another financial advice session; it's a deep dive into transforming yearly budgets into actionable monthly plans. Discover how to anticipate the ebb and flow of your business's finances, learning to read the signs of incoming revenue and imminent expenses. Michelle's wisdom on the nuances of payment terms and customer payment history sheds light on the crucial difference between the cash you have and the sales you've invoiced, a distinction that could make or break your fiscal strategy.
As we move through the conversation, the spotlight turns to the art of managing your cash flow with a finesse that extends beyond the standard Profit and Loss statement. We tackle the often-overlooked balance sheet wonders, from crunching numbers on equipment investments to loan repayments. Here's where the rubber meets the road—we talk about the shortcomings of conventional accounting software and the power of a well-crafted template to keep your cash tracking on point. Remember, it's not about nailing it on the first try; it's about learning from every twist and turn. By the end of our talk, you'll walk away with the tools and confidence to fine-tune your financial forecast like a pro.
This program is brought to you by:
Balanced Virtually
Be sure to visit BizRadio.US to discover hundreds more engaging conversations, local events and more.
Welcome to the Veronica Edwards show, where we have fun financial conversations that everyone listening can apply to their personal and professional life. I'm your host, veronica Edwards, back here, season three on biz radio dot US. As always, want to thank the V team and all those downloading the podcast and listening live. As we approach season four, we're going to keep emphasizing that we're trying to get to the 4000 downloads and one of my favorite monthly segments, my only monthly segment is our. Cpa chat is today with Michelle hey, michelle.
Michelle:Hey Veronica, how are you?
Veronica:I am wonderful, I'm wonderful, wonderful. Michelle, and I was just chatting before we got on the air. You know we pre-record, so we were getting ready for 2024. This will air in January, but we were just saying, as CPAs and I think all business owners, take this time to decompress and you know when you do have this holiday season and no one else is working, try not to work either. It's kind of the saying when you have a baby, they're like sleep when the baby sleeps and you're like no, but I can get everything done.
Veronica:It's like no, when nobody is working, don't work either, so you can enjoy a holiday.
Michelle:That is so true. That is so true. I like I really enjoy the holidays because I know everyone else is off as well, versus when I take time off for vacation. I like I know I'm going to come back to like a desk full of I need to respond to things.
Veronica:Yeah, so today we definitely wanted to provide a blueprint for cash flow forecasting, because this will air the beginning of the year. Most of our listeners are calendar year based, so their year begins January and ends December and so, michelle, if you can kick us off, we want to talk about five steps for effective cash flow forecasting.
Michelle:Yeah, I mean, you know, cash flow forecasting it's it's not really too terribly different, you know, for most small business owners.
Michelle:Then, actually budgeting for your coming year, say, for example and I want to just stress that point because we're going to be talking about and looking at the same types of things, the same things that happen in our business, the same principles, you know, there's revenues, there's expenses. The only difference between budgeting for the year and a cash flow budget is really taking a look at what it is that's going to be happening in your business in terms of revenues and expenses, but then posting, you know, or looking through the lens, I guess I could say, of in terms of when will I get that money and when will I expend that money. So it's really just kind of taking that same budget, kind of flipping it on its ear a little bit, so to speak, in terms of really what is happening to my cash. And so when you start, you know, if you just look at, if, let's just say, you've budgeted appropriately and properly for the coming year that's where I generally tell my clients.
Michelle:That's where we're going to start. Once it's take your budget for the coming year, that P&L and let's look at it. Where are the revenues that we budgeted for and hopefully you can take? Even if you did an annual budget, let's start putting it to a monthly budget and then look at those monthly figures and start thinking now in terms of, okay, realistically, from a cash flow perspective, what's my cash bank balance now, or expected to be as of, say, january 1, and then what additional revenues am I going to be bringing in and how will that impact my cash? So I'm going to look at my sales. Where is the money coming from, start putting that into either separate revenue line item streams or something, but just adding in all of the, the monies that you know are going to be coming in. And I think a key consideration in terms of cash for folks to understand is when you invoice a customer that's ready but that's not cash, and so then you have to think about you know, what are your terms of payment.
Michelle:Do you give people generally 30 days, 10 days, 90 days? Like? What is your? What are your terms? Like? That's when you should expect your customers will pay you and if you've been in business for a while, maybe even looking at historical information, this particular customer pays me in 90 days. This particular customer always pays me in 45 days. Or this particular customer is what I always have to nag. Or this customer pays me in 10 days. Just looking at some of the even not all your customers, but maybe your top 10 customers, the ones that you're invoicing the most or have the most dollars tied up in terms of invoicing. Being sure to look at those customers, what is the time frame in which they typically pay you? And then in budget for your cash flows based on that information, I think what I'm going to be thinking about also is just other lines of revenue.
Michelle:It's not just about the customers that you're invoicing, but what else might be happening for your budget in your coming year or for your organization in terms of what additional scrap sales of inventory might you be expecting to have. Do you typically do inventory in July and then you sell something that you're going to have a big bump up in cash, say in August, or is there a lawsuit or an insurance claim that you're expecting to come in? Just little things like that? That may not be so little, but that we can forget.
Veronica:Absolutely. And, michelle, I think you hit it on the head with the invoicing side of things. I just recently was working on a cash flow forecast for a client. So selfishly I was like, oh, let's talk about this on the show because it was fresh in my mind. But again, if people use QuickBooks, you'll see on your reports it has the option for cash basis or pool basis, and so you do have to keep in mind when you invoice somebody, even if they haven't paid you the cash, it's showing up on your profit and loss statement as revenue. And so a lot of times I'm having to remind folks when they see, oh my goodness, I had sales of $30,000 and then they say, well, why do I only have 10,000?
Michelle:in my bank account.
Veronica:Well, the timing, like you said of the terms for me being a service provider, I invoice everyone the beginning of the month. They're supposed to pay me by the beginning of the month, so I'm almost on a cash basis because I'm getting the money the same month the invoice took place. But a lot of clients of mine and clients of yours, michelle, they might be project based, so they invoice a huge invoice in January. It might not get paid until the end of the year Exactly.
Veronica:So, that's where you definitely want to make sure you know the timing and you're just not looking at your profit and loss statement on an accrual basis. You really want to look at the timing of the cash coming in.
Michelle:Correct. Yeah, I mean I think you put it so well in terms of the. This is where we're looking at it from a cash basis as opposed to an accrual basis. But I do think a really good place to start, as we were talking about it, is really from that profit and loss statement, from that annual budget that hopefully is now a monthly budget. But what you anticipate in terms of your accrual based revenues and expenses and then look through that cash lens to see when are these revenues actually going to be materializing into actual cash and what's actually happening. So that's I mean, I think that that's a really good point to consider is, you know, it's cash basis. That's what we're talking about. We want to make sure we understand beginning cash, cash income. What is my ending cash going to look like?
Veronica:Yes. So the other side of that is, of course, after you determine what's your cash inflows, well, what are your cash outflows? And, just like you said, michelle, we're going to look at historical data, we're going to look at vendor quotes, we're going to look at all of these different variables. But you should know your business enough to know some of those fixed costs. Do I have monthly rent, monthly utilities, monthly salaries, insurance? But then there are some variable costs related to sales volume. So you can't just say, well, last year I had a million in sales and I had half a million in materials. Well, that could be totally different next year.
Veronica:So one thing that I do look at, when I just don't look dollar for dollar, I use percentages a lot. So I can say I tell people a lot of times when you're building a forecast, building a budget, it's the percentage of sales. So you always start with sales to then determine, so that cash inflow, what your outflow would be. But then you also got to think about one time expenses, unexpected expenses, emergencies, repairs, things like that are going to pop up. But just like you said, michelle, you kind of just have to start with a historical and then just build from there you know what you do, know the knowns, and then, yes, you're going to have some unknowns, but if you can just find the material items, like I always say, that 80, 20 rule, you might not need to break down every single expense, but let's get majority of those expenses accounted for so we can have an accurate forecast.
Michelle:Yeah, I mean, I think that's an excellent point. I mean, your historical data of your business is going to be the best guide in this. You're going to look back, you're going to see what you have spent money on, how you have spent it in the past, and that may trigger you. Oh yeah, I remember when you know I had to have the HVAC system repaired. Oh yeah, that was five years ago. Maybe I might have another sort of you know, major repair that has to be done because it's now been five years later or you know, whatever the case may be. So I always like to tell folks you know, if you've been in business for a while, you know that historical data is like gold. If you are new and new into business, there may not be so much historical data to draw from. That's okay too.
Michelle:There's lots of resources that we have access to. You and I as well as you can even Google in the internet to try to find additional resources. I hate to say the internet is just Google, it's not. There are other. Yeah, that's what I'm saying, but since I use Google so much. But yeah, in the internet you can find a ton of resources and there's a lot of really good examples out there to think about. But, like you said, your business, your budget, is going to be your guide as to what kind of expenses you're going to have and most of the standard things you'll know. Like you said, you're fixed in most of your variable high dollar, volume, variable ones. It's the surprises, or the ones that happen every once in a while, that might catch you off guard. Or most people I find forget about taxes. They just forget oh yeah, I've got to pay my like go to the internet or something Like.
Michelle:it's like, don't forget, that's a real cash thing.
Veronica:Absolutely. One thing I also want to add when we're looking at cash going out, where you're just looking at the profit and loss statement, you're not going to account for some liabilities You're paying back. So like, if you're paying a loan back or credit card, those things aren't going to necessarily. Well, the credit cards you'll see the expenses on the profit and loss, but your loan payment you won't. Or if you're taking an owner's draw. So I do have that sometimes where folks are like wait a minute, my expenses on my profit and loss statement are just $5,000 a month, but it's showing I'm spending $10,000. Well, you paid $5,000 back on a loan. So those are all the things. That leads to the next step. After you look at your inflows, you look at your outflows. Now you need to compare your income to your expenses, and that's where you can catch some of those things. So, michelle, you're a very good analytical person, so what would you say? How do you do this comparison when you're looking at your cash flow projections?
Michelle:Yeah, I mean good point. I usually try to help clients again starting with that accrual-based, monthly budgeted P&L, and then use a tool that, like I said I mentioned. There's lots of tools out there. I happen to have a really good one that I refer to a lot. It's put out by SCORE. They do a great job of using a cash flow forecast model. So I always tell people they've got this great model. Score is an excellent organization to reach out to them if you need help or if you want access to this information. But I have this model that I've used in the past. Like I said, it's based on the SCORE model and it helps me to help the client remember. Oh yeah, let's remember to talk about these other expenses that we were referring to and let's make sure that we've captured everything.
Michelle:But to your point, the most important thing is to also be thinking about what's not on the P&L. That's where the cash flow always happens. It's money in, money out, but it does not necessarily mean just revenues from your customers or just expenses that you're paying for your business. It's also all the things coming in or going out that are on the balance sheet, and by balance sheet we mean you may be planning to do things like a major equipment purchase and you may be planning to pay a cash down payment for those things. Or you may be getting a loan. Maybe you're getting an equity kind of a loan and you're going to get an infusion of cash. So you have to remember that that's money coming in as well as, or could not be, may not sorry, may not even be from a financial institution. Maybe it's from an investor or from a family member or somebody who is going to be infusing cash. Or maybe you are, like you mentioned, owner's draws or owner's contributions. So all these things where we're infusing cash into the business or the things where we're taking cash out of the business that don't show up on your P&L or your income statement payments on our loans, receipt of loans, owner's draws, owner's contributions, any purchases of capital equipment those kinds of things that we're going to be doing we want to make sure we account for also, and so when you get all that information together, using some of these tools to make sure you're not missing anything major, I think is a really good suggestion.
Michelle:Just get a tool. Like I said, use the internet to see what other suggestions or recommendations or what other charts or spreadsheets or tools are out there so you can remember to keep it all together. Did I remember to bring in everything? Did I remember to think about all the different possible ins and outs of where my cash might be going? And I think it's just so important Because, as you said, clients understand their business generally, even if they're new into business, like I'm going to make this thing and I'm going to sell it and these are the costs I'm going to incur to make this thing. But I think what you know businesses often forget about is there's just so many other things happening that you forget or that you don't realize and that when you run your P&L and then you look at your bank account, you're like I don't understand why are they so?
Veronica:Yes, or sometimes people can get confused because within all accounting softwares like QuickBooks, they do have a cash flow statement, but it's not necessarily what I think a lot of clients are expecting. It's breaking down your cash Into operating and investing and financing. I think a lot of times what people are looking for when they say cash flow projections, especially if they're trying to do their business plan, they're trying to get alone. It's exactly what we're talking about is listing all your cash inflows, listing all your cash outflows, to get an idea of what you need on a monthly basis cash wise. I personally am just simple. I just use an Excel spreadsheet, but I do have a template that I use to where it will show the beginning cash, the inflows, the outflows, ending cash, and then we just keep rolling it, but kind of in a profit and loss format, and then just adding in some of those balance sheet items, like you said, so you don't have to spend a lot of money. I love that you mentioned the score cash flow models googling that, michelle, when you were talking about it. So that's great information and I said we have five steps, but it's really for.
Veronica:And the last thing is like any forecast. You need to adjust based on actuals. So this is the part that I love is I want to see how accurate I am, you know. Then it becomes like a little competition. So I tell people, you know, don't beat yourself up, especially the beginning of the year, because you're just kind of just taking a stab at it. You know you, we know what we think we might have Typically for a quarter or two quarters, but you'll really start to take shape once you get some actuals for the first quarter of the year. So when that comes in, you make adjustments and that's fine. And you just have to remember oh okay, I told like you said, michelle, I forgot the beginning of the year have to do my annual insurance renewal, you know, or this licensing or this one time thing came up, and a lot of times you can remember the year, but maybe it's the dollar amount, that's all right so don't beat yourself up in the beginning.
Veronica:You just have to kind of pivot and adjust anything with that, michelle, that you want to add. When it comes to Wrapping up the whole analysis, is just making sure you don't get stuck and beat yourself up, because prices can change, you know, and your budget on a positive side, you might budget too heavy and you actually have a surplus of cash, right? Yeah, exactly.
Michelle:I think you're you're exactly right. I think the key here is don't do it this budget forecast is cash flow budget forecast, or whatever and stick it on a shelf. It is imperative that you set a plan but then you each month put in the actuals and adjust the forecast for the coming months, and that's gonna be super informative and it's really important to just kind of constantly be monitoring it so that this is the way that you can really help yourself to make sure. Oh yeah, I forgot that. Or you know, this is more than I have budgeted for and I need to do something else to preserve cash. Or hey, I've got a windfall, this is great. You know this is more money than I had budgeted or forecasted for. What would I miss? What did I not anticipate happening, etc.
Michelle:These are all really good learning tools and tools that you can use to adjust going forward. It's just super important to constantly be updating it with actuals and adjusting for going forward and catching it on a timely basis. I would encourage folks to be doing it monthly and each month, take the time to put in the actuals versus what you had expected and how does that impact? Again, with these tools that we were just talking about. If you use them, they have the formulas built in. When you go in and you put in the actuals, it will literally adjust the coming months based on the formulas.
Michelle:You just want to make sure to find a good tool and be updating it monthly and look at it on a regular basis so that you can make timely pivots, timely adjustments, so you've never run out of cash. Because again we've talked about before cash is king. That's why this is such an important topic and why we're talking about it. How can we budget for our cash? Because we know we need cash and we don't want to run out of cash. It's not just by looking at our P&L, because cash is different than the accrual-based.
Veronica:Absolutely, Michelle. If those listening want to get more of your expertise on budgeting and cash on all that stuff, can you please provide the listeners information about your business and how they can reach out to you for those services?
Michelle:Yeah, no, absolutely. Thank you so much for asking. Of course it's Michelle Trotz, cpacom. That's our website. You'll find out a bunch of information about myself, some bios of the team members, as well as the services that we provide. We also have a Contact Us form. You are welcome to just send us an email. Hey, I'd like to speak with you about getting some assistance with our budget and our cash flow forecast. We'd be happy to talk with you.
Veronica:Wonderful. Well, thank you again, michelle, for coming on. As always, I get a lot of great feedback that people who don't even own businesses have found a lot of value in what we've been talking about. So for those listening, please send us a direct message. Let us know any topics you would want us to talk about in 2024. But again, michelle, thank you. We cannot have this segment without your expertise. So, thank you, thank you, thank you again, and I want to thank the listeners for tuning in to bizradious. Please come back next week, same time, same place, 10 am on Wednesdays for the Veronica Edwards show and if you missed the live airing, you can listen to all prior shows at VeronicaEdwardsbusbrowcom.