Copyright (c) 2010 Kelly Totten

Forecasting cash flow for a one invoice project is pretty easy to understand.  Cash will hit your bank account when that invoice becomes due. But what about projects that have multiple billing milestones?  How can you predict cash flow for multiple future billings over an extended period of time?

*What do you really want to know?*

Part of the confusion with predicting cash flow is understanding which tool to use for the job.  QuickBooks does have a cash flow forecasting report which is useful for telling you what should happen for the invoices and bills that have been entered into the system. This type of forecast will easily show you when payments should arrive in your bank account (if everyone pays what they owe on time) and when payments will leave your bank account (if you have every payment entered as a bill and pay them on time). If you want to know what should happen, the QuickBooks report will work just fine.  If you want to know what will happen based on real life conversations....keep reading.

To generate the QuickBooks type of cash flow forecasting for progress billing, you would need to enter your invoices at the beginning of the project.  You would then set a reminder to actually send the invoice on the date of said invoice. This approach is dangerous.  There's a pretty big risk that the invoice won't be sent or, if the scope changes, no on will remember those invoices were out there. In those cases, your cash flow forecasting is wrong and you'll end up calling collections for invoices that were never sent and/or aren't owed. 

*Real life is messy.*

In addition to the risks involved with invoicing early, the forecasting report is limited to what SHOULD happen. We all know real life is messier and you want to know what WILL happen to your cash.  Every day you are having conversations about late invoices or accepting payment arrangements.  You know that your biggest client always pays at 60 days, even though the invoice is due in 30 days.  The only way to get those adjustments into QuickBooks is to change what should happen to what will happen.  Do we really want to change due dates in QuickBooks to match what you know will happen?  Absolutely not!  We want our accounting systems to reflect our contractual agreements.  We need to accurately reflect how past due invoices actually are.  How else will you have effective collections conversations?

*A better tool for the job.*

The cash flow forecast, on the other hand, needs to be an estimation of what really will happen. A relatively simple Microsoft Excel spreadsheet is usually the best tool for the job.  This spreadsheet will track when you expect your revenue to hit the bank account and when your bills and payroll will leave the bank account.  The first column (each column represents a time period, usually a week) in your spreadsheet will begin with your bank account balance, then add incoming cash, subtract outgoing cash, and finally total to what you expect to have left in the bank.  That ending bank balance will be the beginning bank balance in the next column (time period)...wash, rinse, repeat.

For our progress invoicing question, as soon as the project agreement is signed, we can drop the cash receipts into the weeks we estimate they'll be received. Of course, the project may change course causing the invoice dates and cash receipt expectations to change.  When that happens, we'll make those adjustments in our spreadsheet and immediately see the impact on our cash balance. 

Keeping an updated cash flow forecast will enable you to make smart money decisions.  If you see the ending balance is going negative, you know you need to make some adjustments to your plan.  If you want to make a large purchase or extend longer payment terms to a client, you can make those adjustments in your forecast; you'll know if you have enough cash to support it before you make the commitment.