Treasury forecast: a decision-making tool for SMEs
Drawing up a treasury plan may seem complex at first, but once you know the right practices, you can forecast and monitor your company’s financial balance easily.
What are the objectives of cash forecasting ?
“How to make a treasury forecast ?” Many VSE and SME managers ask themselves that question and it’s not surprising as it’s an essential part of a business’ financial planning. But if you are an entrepreneur or business owner, you may not be familiar with this process and may be more tempted to use an Excel spreadsheet to make your forecasts.
Regardless of your industry, it is in your best interest to develop a forecasted treasury plan. The latter enables you to ensure that your business can continue to grow. A good treasury plan will enable you to assess your ability to react to financial difficulties or to invest.
Indeed, you will be able to anticipate periods of lower cash flow and be able to plan some adjustments such as reducing some costs, finding solutions to generate more sales or financing your working capital needs.
If your business is successful, you may consider expanding into new markets, investing in new sectors or products, acquiring larger premises, recruiting new employees.
How to make a treasury forecast?
There are two options for making your treasury plan:
- Making a forecast table using Excel
- Opt for specialised treasury management software
Excel has certain advantages and certain freedoms, but it does not fully meet the objectives of efficient treasury forecast management: regular manual entry increases the risk of errors, reports are not very explicit, etc.
A specialised online treasury forecasting software, such as Cegid Iziago, is therefore a good choice if you want an easier to use and more accurate tool for your forecast.
There are four main steps to developing a treasury plan.
1. Determine the timeframe of your cash flow planning
Cash flow planning can cover a few weeks to several months. Plan as far ahead as you can accurately do so.
If you are well established, you may have a predictable sales pipeline and plenty of data from previous years. It will then be easy to establish stable and accurate treasury forecasts over the long term.
If you are a new company, you may not have a lot of data. If you plan far in advance, your forecasts may be less accurate. But don’t worry, your treasury will evolve over time, and as it does, you’ll get more accurate estimates and be able to update your forecast more easily.
2. List your income
For each week or month, depending on your planning deadline, you should list all your company’s collections, i.e. all cash that has been received. Make sure you don’t forget any of them:
- Your customer invoices
- VAT refunds
- Grants or subsidies
- Loans or financing
- The equity contributions …
Remember also that you must indicate the amounts when they will actually be in your account.
The sum of all these amounts will tell you your net income.
3. List your expenses
As with your collections, you should then list all your disbursements, i.e. all expenses incurred by the company. The salaries of your employees
- The salaries of your employees
- Remuneration of your service providers
- Social charges
- Your taxes
- Loan repayments
- The rent for your premises
- L’achat de fournitures …
Once you have listed everything you pay out, the total will be your net expenditure.
4. Calculate your treasury forecast
Once you know your net income and net expenses, you simply subtract your net expenses from your net income to find your projected treasury. Ideally, this should be done on a weekly or monthly basis.
With a dedicated software, such as Cegid Iziago, you will be able to automatically generate recurring forecast transactions such as rent, or salaries, and automatically calculate your treasury forecast, without any risk of errors.
You can then keep a cumulative total, week by week or month by month, to get a picture of your treasury forecast over time.
Too many weeks with a negative balance can cause problems. You will then have to find financing solutions to meet your commitments, pay salaries, loan repayments or rent.
But on the contrary, a few positive months could indicate that you have the means to develop or to invest.
Avoiding mistakes in your treasury forecast
There are a number of factors to consider when making your treasury forecasts to avoid mistakes.
Think about payment terms
Ensuring that you get paid on time enables you to calculate your projected treasury in a more stable and reliable way, so it is important to anticipate the payment terms agreed with your customers. Ask yourself, “This order my customer placed in October, when will it be cashed?” Depending on the timeframe you have agreed, the amount may need to be included in your forecast for the following month.
Similarly for your expenses, always pay attention to the payment terms you have agreed with your suppliers. When do you have to pay or will you be debited? It is important to plan for this cash outflow at the right time on your projected treasury plan. By paying attention to payment deadlines, you can ensure that your company has sufficient funds in its treasury.
Watch out for variable expenses
Some charges do not occur every month, or are not the same every month. This may be the case for social charges, purchases of materials, transport costs, or electricity costs.
Beware, these expenses can easily be forgotten or underestimated even though they are very important for a good treasury plan.
You need to determine what your variable costs are and why not apply conservative assumptions to anticipate them.
Don't forget VAT
It is important to remember that all sums are to be understood as including VAT and not excluding VAT, as this will simplify your calculations later on.
In fact, a company pays VAT and recovers the excess VAT from the tax authorities. Similarly, when a customer payment is received, the company collects the amount in VAT and must then pay the excess VAT to the tax authorities.
Therefore, do not forget to show the amounts of VAT to be paid or collected in your treasury plan.
Once the keys are in hand, it is not complicated to draw up a provisional treasury plan. However, this remains a time-consuming task for which rigour is required to avoid mistakes in manual data entry. This is why more and more companies are offloading this task with the help of specialised software. Cegid Iziago is a treasury management software that enables you to make your cash flow forecast easily and without error. In a few minutes, you get a clear, precise and real-time view of your treasury.