Many small business owners are facing uncertainty all year round…
Unsure whether you have enough cash to pay for wages.
Unsure whether you can afford to hire that new team member.
Unsure whether you can accept payment on completion for that large project you bidded for.
So what can you do to find answers to these?
Instead of running your business blind, one solution would be to have a short-term cash flow forecast.
A short-term forecast will help you to answer questions - like the ones above - giving you the confidence to run your business with certainty and make key business decisions.
So to help you understand how this works in the real world, we’ve created a case study forecast using Ryan's Design Agency as an example.
Here’s everything you’ll find in this case study - feel free to watch the video snippets, read the excepts, or both. You can even follow along at your own pace with your own Helm forecast!
- Ryan’s Design Agency - The challenge
- Step 1 - Initial forecast set-up
- Step 2 - Tailoring your forecast
- Step 3 - Testing different scenarios and future events for Ryan’s Design Agency
- Ready to forecast?
Let’s start by giving you a bit of background to Ryan’s Design Agency…
Ryan’s Design Agency - The challenge
In this guide we will walkthrough creating forecasts for a fictitious company called ‘Ryan’s Design Agency’.
We’ll be using Helm Cash Flow to do this - but other cash flow forecasting tools are available (just don’t use spreadsheets, please!).
Ryan’s Design Agency is a growing design agency that has taken on a large job which they are about 50-60% of the way through.
They are expecting to be paid for the rest of the project upon completion, something that is not uncommon for design agencies.
The challenge for Ryan’s agency is that they have taken on a lot of up front cost in terms of employee wages to complete this project and they need to hire an additional employee to help with the current workload and continue their growth trajectory.
The question is; can Ryan’s Design Agency complete the project and hire a new employee before payment for the project is received?
While Ryan’s Design Agency will be our basis for this case study, the challenges they face are shared by many businesses (you might even spot yourself in this exact situation!)
Step 1 - Initial forecast set-up
Before diving into the forecast, we need to set up Ryan’s Design Agency.
Setting up a new company in Helm is quick and easy.
From the Dashboard click ‘Create Company’ in the top left. Next enter the company name, select your time zone and payment plan. When you're done click 'Create Company' in the bottom left.
After selecting your accounting system you will be asked to login to that system. Please rest assured this is completely secure.
Once you are logged in, Helm will start importing your accounting data to start building a preliminary forecast.
Please note - this is just an initial forecast and is likely to need some changes. Before we can make those changes, let’s give you a quick tour of how things look in Helm…
When you first login to Hem you’ll notice it looks very different from your spreadsheet forecast, and there’s a reason for that! In talking to small businesses we found that spreadsheets confused them. So, we designed Helm to be very visual to help make collaboration easier!
In the top center of the screen the line graph is simply your bank balance over time (if you're just getting started in Helm it'll probably look very simple but as you add assumptions and create forecasts that’ll change). Above this graph you have the option to view a 1 month, 3 month, 6 month or 1 year forecast.
Just below it you’ll find the ‘Transactions’ Graph, which is an overlay of your transactions. Anything above zero is a cash in, anything below zero is a cash out. The size of the bar also represents the amount. You can hover over these bars to quickly check what your most impactful events are.
On the left you find tabs for ‘Bank Accounts’, ‘Accounts Receivable’, Accounts Payable’, ‘Forecasting Rules’, ‘Views’ and ‘Scenarios’.
Starting with Bank Accounts you’ll see that Helm automatically connects with your accounting system and pulls out the reconciled balance. Helm uses the reconciled balance because some clients still use cheques, and sometimes these cheques don’t clear the bank account.
Under ‘Accounts Receivable’ you can ask Helm to calculate your average days receivable. When you click ‘Calculate ADR’ Helm will analyze your data and make calculations based on how your customers have paid you in the past to make predictions on how they might pay you in the future. While this isn’t a crystal ball it is more accurate than forecasting off of due date, which is how most spreadsheet forecasting is done. You can also manually make changes to due dates as needed.
Similarly under ‘Accounts Payable’ you can calculate your average days payable (‘Calculate ADP’). Like with receivables Helm will analyze your data and make predictions based on how you’ve paid in the past. You can also manually make changes to payment days.
Just below ‘Accounts Payable’ we go into ‘Forecasting Rules’. In this tab we click ‘Generate Rules’ and Helm will create your first forecast based on your past data! You’ll now see your first forecast graphically on the right hand side. While you’ll likely want to make some changes (more on that below) we’ve just made a forecast in a couple minutes with three clicks, something that would take hours to do manually in spreadsheets!
Step 2 - Tailoring your forecast
While Helm does a lot of heavy lifting for you behind the scenes, you’ll always want to review your forecasting rules.
Ultimately these rules are just logic and algorithms, and like any algorithm sometimes they get things wrong. So while Helm may feel like magic, there’s no crystal balls here quite yet, so let's review some forecasting rules!
The first one we’ll review here today is payroll. If you're making a lot of adjustments to your payroll Helm can sometimes view this as variable data, and not as a fixed and recurring. By clicking on the ‘Paid On’ column we can change the date and frequency of our wages to a bi-weekly pay run. We can also change the amount under the ‘Amount’ column.
Next we will look at insurance. This is where your knowledge of the business can come into play. In Ryan’s Design Agency, Helm has detected a monthly issuance payment, but we know that this is actually paid annually. If there was two or three years of data Helm would correctly identify this, but since this is a new transaction it is being misrepresented. As with payroll we can easily change the date, frequency and amount to correctly forecast this payment.
Now is a good time to point out that Helm only surfaces from the Profit & Loss Statement and not the Balance Sheet. Helm does this to avoid double counting from accrued items. Again insurance is a good example where you’ve a prepaid expense and some kind of accrual adjustment every month. What this means for anyone with a debt payment, we are only pulling out their interest statements. To accurately forecast, be sure to change the amount to include the debt amount.
At this point you should see the forecast looks quite different then it did just a couple minutes ago and more accurately represents reality!
Step 3 - Testing different scenarios & future events
Now that we’ve got our base set up let’s remind ourselves of Ryan’s Design Agency's situation and goals.
They are in the midst of a large project which they expect to be paid for upon completion, and are looking to hire a new staff member. So let’s run through some forecasting scenarios to see what life could look like for Ryan’s Agency based on their choices.
To enter the project into our forecast we’ll go to ‘Forecasting Rules’ and click ‘Create Rule’. This will open a pop where we can enter the name of the project, the account, expected date and of course the amount.
In this case Ryan’s Agency is expecting $40,000 on August 15th. Looking at our graph we can now see a big jump in cash from the project. But Ryan’s Agency also needs to hire a new employee and take into account this cost.
Again, from the ‘Forecasting Rules’ menu will click ‘Create Rule’ and as the employee payroll based on the expected start date and enter their bi-weekly wage. With that updated we now have a good image of where Ryan’s Agency is headed.
In this case Ryan’s Agency will be cash positive overall but there is a period of time where the run into trouble in things go how we expect. So let’s test out some potential scenarios that keep Ryan’s Agency in the black.
Scenario planning is where Helm can really shine. Testing and visualizing different scenarios is quick and easy.
To add a scenario click on ‘Scenarios’ in the bottom left then click ‘Add Scenario’. Adding a scenario in Helm means that all the data in the base case is copied, and you are now free to make adjustments to date and amounts and compare them.
Let’s test a scenario where Ryan’s Agency gets paid a month early (July 15th), and another where they get paid late (September 15th) for their work.
To do this we can go in and manually adjust the date for project payment or we can just drag and drop the values on the transactions graphs. Once you do this you can immediately see in the cash balance graph above how the two scenarios compare. From these forecasts we can immediately see that if Ryan’s Agency is paid early they will be cash flush, but if they are paid on time or late it will be difficult.
Now it’s not to say we immediately have a solution here, but what Helm does is quickly give the necessary information and optics on how to approach the problem. There are multiple solutions here:
- Ryan could delay his own salary
- They could get a line of credit
- They could accelerate the project with their new employee or
- They could entice the customer to pay early by giving a discount
The highlight here is that Helm lets us get to this point quickly and with accurate information.
To see how quick and easy it is, let’s quickly map if Ryan’s Agency gets paid early with a 10% discount.
Under ‘Scenarios’ we’ll duplicate our paid early case and change the amount under ‘Forecasting Rules’ to reflect the 10% discount. While there's no guarantee that the client will pay early, we can see that offering this discount would put Ryan’s Design Agency in a much better cash flow position compared to the base case.
Ready to forecast?
Hopefully this real-world case study has helped you to see just how helpful a short-term cash flow forecast can be for small businesses like Ryan’s Design Agency.
By having a forecast, we’re able to plan for different scenarios and events, and tailor our decision making accordingly.
And by using a tool like Helm, we’re able to quickly and easily pull this together, without needing any forecasting experience or spending hours building complicated spreadsheets.
If you’re a small business owner like Ryan and you’d like to be able to make more confident decisions about the future of your business, or maybe you’re an advisor working with small businesses like this on a daily basis, then start a free trial of Helm today.
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