Liquidity forecasting that secured further funding

Situation

A software business owned by a private equity firm was running short of cash. Revenue was growing, the product worked and the business had a plausible future, but the bank balance kept surprising everyone. Management could describe the annual plan in detail and could not say what cash would look like in six weeks.

The owners had already put money in. They were open to putting more in, and they were not going to do it on the basis of a forecast that had been wrong three times.

Constraint

There was no forecasting capability in the business at all. Subscription billing meant receipts were spread unevenly and did not follow the revenue line. Nobody owned cash as a job. Finance produced a monthly P&L and considered that the answer, and operations made commitments without anyone checking what those commitments did to the account.

The deadline was set by the cash itself. A forecast that arrived in two months would arrive after the decision.

What was built

A short-term cash flow forecast on the direct method, weekly out to 13 weeks, built from the billing system, the debtors ledger, the payroll calendar and the contract base rather than from the P&L. Receipts were modelled on how customers had actually paid rather than on their terms.

Around the model, a weekly process: a fixed submission deadline, a variance review of the previous week’s forecast against actuals, and a one-page pack for management and the owners. Every week the forecast was compared with what happened and the assumptions were corrected.

Who it was built with

The finance team, with one analyst working through the build and taking over the weekly update. Sales and customer success were brought in to explain collection behaviour, which is where the largest forecasting errors had been coming from. The management team joined the weekly review, so cash stopped being finance’s private problem.

Outcome

Once the weekly cycle had been running long enough to show a record of forecast against actual, the business could answer questions about its cash position with evidence rather than assertion. That record was what the private equity owners needed. Additional funding was secured to carry the business through, and the weekly rhythm stayed in place afterwards, run by the client’s own team.

What this looks like for you

If an investor, lender or board has lost confidence in your numbers, the fix is not a better looking forecast. It is a forecast with a track record. Four weeks of comparing forecast to actual in public does more for credibility than any single model. See cash flow and financial modelling.