Achieving a (Cash)Flow State - the ultimate guide to 13 week cash flow modeling
The 13-week cash flow model is the lifeblood of any inventory-heavy business. As stewards of the physical universe, our business moves in cycles—cash conversion cycles, to be exact.
Think of me as your Cash Flow Shaman, guiding you through the sacred rhythms of liquidity. As a CFO, your duty is to achieve true financial enlightenment—to become one with your cash cycle.
Breathe in with purchase orders. Breathe out with free cash flow.
The better you master this flow, the more aligned your business becomes with the forces of growth and stability. So please, let's embark on this journey and achieve a [cash] flow state - together.
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Why forecast cash flows?
First - let’s contemplate the why - why is our duty to become one with our cash flow?
Great question, my eager liquidity disciple. The 13 week cash flow model is a mission critical business exercise because it answers the who, what, when, where, and why of your cash.
Who am I paying?
What am I paying them?
When am I paying them?
What am I paying them for?
By becoming one with your cash flow, you can establish budgets, controls, and generate value within your business - all while avoiding costly cash flow mismanagement mistakes.
How to create your cash flow model
Step 1 - Establishing a beginning & Ending cash balance
This part is extremely simple. The first step in becoming one with your cash flow is to very simply understand how much cash you have today. This is the first input into our model. Let’s say we have $1 million - plot $1 million as beginning cash balance:
Step 2 - Forecasting Accounts Receivable
This part is only applicable if you are selling in retail, or some other distribution channel that does not pay immediately. For this example, we are going to say we are in selling in Target and they pay us once a week usually.
2.a) Export your A/R from your accounting ledger
2.b) Create a sumif in the forecast row based on the date. This will add up all the receipts for the given week and return them as cash receipts
2.b) Color this font green, to indicate that it is pulling from another tab
Step 3 - Forecasting Online Sales
In order to adequately forecast your online cash receipts, you need to have some semblance of a daily sales plan. From there, you can follow a similar methodology to the A/R mapping. For simplicity purposes in this exercise, we are just going to say we will receive 100% of the shopify sales we generate each week.
Return this to your summary tab in green:
We will skip amazon for this example - our example store only sells on target and online.
Step 4 - Forecasting A/P
Forecasting accounts payable is the same as accounts receivable. Please see step 2 and apply to the same logic to a list of A/P. Return the values in green. Ideally, do this on a supplier by supplier basis. These are our first outflows.
NOTE: Make sure you have connected [corkscrewed] your beginning and ending cash balances so that the beginning balance of P1 cash balance is = to ending balance of P0
Step 5 - Forecasting Other Expenses
Other expenses may include the following:
- Credit Cards
- Payroll/contractors
- Software expenses
- Sales tax
- Debt payback
- 3PL/Logistics
For the following, we suggest using sales as a proxy for the forecast if performing your weekly cash flow in something like excel or google - if in Iris, we can take into account multiple variables that will help shape what we believe these expenses will be:
- 3PL
- Sales Tax
- Debt Payback
In our example, we are going to apply a % of sales driver. For this beginner version we are going to avoid debt schedule modeling - though, iris handles this nicely and easily.
Step 6 - Credit Card Bills
Ideally, you are building an entirely different model for your credit card spend. I am getting a little tired of this now that iris does it all instantaneously, so I am going to show you an iris screenshot where we have a drop down for your bank cash flow model, your credit card cash flow model, and your Ap/Ar model.
You will want to consider some method for forecasting your credit card spend; it can be linked to your daily goals, as the majority of this will be ad spend
Then, once you have created your credit card model, you can map the disbursements into the cash flow model as outflows. Let’s say we came up with 100k/mo in credit card spend, mapped here:
And there you have it! You have now created something that requires constant upkeep and manual updating. Congratulations, if you want your model to stay current you now have to go through every single one of these lines every single week and update them manually to see where you got things wrong. Then, once you inevitably botch your forecast, you can use those learnings to try to make it better, only until you decide to stop updating it again.
Note: this is a grossly oversimplified model; though it captures the essence and practical approaches to cash flow forecasting - creating intertwined sales and cash flow models, recognizing known and unknown variables.
