Cash Flow Use Case: Tracking Actuals vs Forecasts to Harness Business Growth

Dryrun is tailor-made for forecasting your cash flow but the term 'cash flow' can have different connotations to different people. As we talk to customers on a daily basis, we find that they often are focused on a segment of their cash flow that is causing particular grief in their business.

For example, in project-based service companies, from creative industry through to industrial, the main pinch point is often the invoices they send out. These invoices are usually large, highly variable in amount, due date and even payment terms.

Tracking when the money will arrive in their account, what's outstanding and what's overdue is critical against the backdrop of their monthly expenses and project-related purchases. Further complicating the matter is the ongoing sales process as they line up jobs for the next month, quarter and year.

Meanwhile, in the case of manufacturers, we find that the key struggles come in large outlays of cash as they create their products. Raw materials, labour costs, machinery, short-term contractors, all lead to money going out. The trick is to juggle these up front expenses with income that comes in the form of large wholesale deals to distributors, often seasonal in nature.

These sales can be balanced with direct to consumer sales that come in a series of smaller transactions. Managing these numbers to make sure that you stay in the black is critical.

Nearly any business we come across has a pinch-point in their cash flow that needs to be addressed. Dryrun is a critical tool to help businesses forecast their cash flow, model out where they are headed and identify potential issues and opportunities in the data.

Although Dryrun's core strength involves modelling out the future, it's also a critical tool for tracking the inflows and outflows of cash into the business on a daily basis. Performing these two tasks together is not only highly efficient, it's critical for maintaining an accurate forecast and grip on the business.

Forecast vs. Actuals

So, how do you build a model that looks forward, while keeping track of today, this week and this month?

We suggest that running two scenarios in Dryrun early on is a great way to start.

The first scenario is your 'Actuals.' This scenario will track your ongoing expense budget that will help you set a break-even point of regular expenses alongside the invoices you have sent out and the large bills that you need to pay.

The second scenario is your 'Forecast' and is similar in a lot of ways. It may still contain that ongoing expense budget but the invoices and bills are estimated well ahead of time. For some businesses, they are primarily using the forecast to predict the large purchases they will need to make in order to produce product.

For other businesses, the forecast is very sales-heavy as they predict and track the potential deals they are chasing, negotiating or closing.

We know your needs might be slightly, or even wildly different from other Dryrun users and we know that the larger business gets, the more complicated the transactions become. So, that's why we have built a high-level of flexibility into Dryrun.

Getting Started

I'm going to run you through a typical set-up of Dryrun. This structure is a very common way for users to get their first deep-dive look at their baseline budget and cash flow.

Section I: Your Actuals

1. Building a Repeating Budget

Building a repeating budget is strongly recommended to help you separate out the 'usual' expenses from the more variable ones that have a heavy impact on your cash flow.

So, what do we mean by repeating budget? Well, we suggest adding items into a repeating budget that occur regularly and are things that you don't need to individually track on a regular basis.

For instance, if your rent is nearly identical every month in amount and due date, you may not need to track it in detail month-in and month-out.

This recurring budget is meant to set down a 'break-even point' of your operational expenses. So, you know that your general break-even point every month is "X." This can be a useful benchmark.

I'll cover the detailed steps for building your recurring budget a little later in the article.

The Benefit of a Dryrun Recurring Budget

i) Categories and Items that Make Sense

Create categories and add items in the way that makes the most sense to you.
For instance, you can add in your payroll, repeating bi-weekly but separate out the payroll taxes if you'd like to see them separately.

You can use a high level of detail where necessary and little detail where it might not be required, such as having a single line item for 'Utilities' rather than breaking out every expense.

ii) Robust Repeat Options

You can add on nearly any repeat option that you require. Pay your staff bi-weekly? Insurance bills quarterly? Only want to repeat and expense for 3 months? You can build a budget that repeats indefinitely and only needs to be addressed when something changes.

iii) Fire and Forget

This recurring budget likely won't be penny-perfect or to the day but it can provide a solid baseline every month that can run untouched into the future. It can even serve as a baseline budget forecast for months and even years down the road with just a little attention to growth plans.

The huge benefit of separating out this regular, repeating expenses is that it allows you to focus on the things that can have the greatest impact on your cash flow. It reduces information overload and makes these key payments much easier to scan in Dryrun.

Some Key Tactics in Building your Budget

First, are you using Dryrun manually or are you integrating with either Xero or QuickBooks Online?

i) The Manual Approach

If you are building your budget and populating your data manually, you have the complete flexibility to decide where all of your items will go. It's really up to you.

Is an expense virtually the same every month? Is it a relatively small expense? Is it automatically paid via debit or on a credit card?

These factors might make them a great fit for your recurring budget.

ii) Data imported from Xero or QuickBooks Online

I suspect, this is the most likely scenario for many of you. Importing data from your accounting software is a terrific way to reduce the workload and avoid inaccuracies in your data.

Dryrun imports your Bills and Invoices from Xero and QBO. Generally, this data makes up the bulk of the more variable payments made to and from a business. Both invoices and bills often have a due date long after the invoice date (generally at least 30 days) and are often paid manually by check or electronic payment.

Of course, this isn't the situation for every item or every business. Generally, we recommend that if you have payments that are classified as a Bill or Invoice in your accounting software, that you avoid entering those items in your recurring budget - at least for your 'Actuals' scenario.

Since your bills and invoices will be imported and tracked in Dryrun, adding them into your recurring budget will create duplicate items. That's something we want to avoid.

So, when you are building your repeating budget, only enter items that are not bills and invoices. These items are often paid on credit card, direct withdrawal etc.

If nearly everything is classified as a bill or invoice in your business, then a recurring budget might not be a good fit for you. That's ok. It's not a requirement, just a suggestion to help reduce the complexity of your data.

You can add in the few items that aren't classified as bills into the Payables section with full auto-repeat functions so that you can view all of your expenses in a single place if that works better in your circumstance.

Creating Your Repeating Budget

Here are the steps to create your repeating budget in the Recurring section of Dryrun.

Overview:

To build this budget, you will create categories to help you keep track of the expenses in groups that are meaningful to you. ie. Payroll, Utilities, Rent, etc.

Then you will add the individual items into the categories with auto-repeats applied and repeating on the most likely date the cash will leave your account to cover the expenses.

For instance:

Direct withdrawal: for expenses that are automatically withdrawn from your account, it's a good idea to set on the date of the withdrawal

Checks: if an expense is paid by check, you can use either the date the check is cut (which is the safest bet) or you could set the date a couple of days later to account for the time it takes a check to clear

Credit card: when payments are on a credit card, I find it useful to date them all on the approximate due date for the credit card every month

TIP: Use a template to help you get started

Steps for Adding Recurring Budget Items

Decide when you would like to start your budget. We often suggest the first day of your current fiscal year or the start of the most recent quarter. You can also simply start on the first day of the current month if you'd like.

i) Go to the month for the start of your budget with the 'Go To Date' button at the bottom-center of graph.

go to date

ii) Click on the month you want to enter your first record, then click on 'Recurring' in that month to expand the section

iii) Click 'Add Item' to add your first item

add item to cash flow forecast

iv) Click on Category in that window and add your first category, let's say 'Utilities'

add category

v.) Now that you have your new category, add your first item. For instance, name the new utility item 'Power' and add an amount. You can also select a repeat date and type. Does it generally repeat monthly on the 15th?

new item

vi) Repeat these steps until you have your budget built

TIP: It's useful to plan ahead here and duplicate your scenario at this point so that you have your raw, repeating budget to use in another scenario later - before you start entering more data.

2. Adding Your Variable Income and Expenses

Once you have your recurring budget built, you can turn your focus onto the more variable, larger payments that flow in and out of your business. Often the expenses are not a typical operating expense but a cost related to creating your products, delivering a particular project etc.

The key here is to recognize that forecasting isn't financial reporting. Forecasts won't be 100% penny-perfect and that's ok. It's meant as an operational tool that helps you identify issues, plan for growth and make strategic decisions on an ongoing basis. Whatever structure works to help you do that is the best approach for you.

[bctt tweet="Forecasts aren't penny-perfect...they're meant as an operational tool that helps identify issues"]

Now that you've created your recurring budget, you can enter or import the invoices and bills that are not in your budget but are required to get a full circle picture of your cash flow. Remember, these items are often the most variable in nature and are often large amounts so careful tracking is critical.

Your bills will be entered into the 'Payables' section of Dryrun. When you add an item here, it will default to a non-repeating item since it's likely a one-time bill, but you have the option of adding a repeat to an item here as well. This can come in handy if you decide not to use the Recurring section of Dryrun but have a few items that you'd like to automatically repeat in as an expense.

The invoices that you have issued to customers will be entered into the 'Receivables' section of Dryrun in a similar way to Payables.

i) Manual Entry

If you are entering data manually, then the process is very similar to adding items and categories in your Recurring section. If you want to reconcile your starting balance, either for the first of the month, or even the current day - you can make that change right in Dryrun.

ii) Integrating with Xero or Quickbooks Online

If you want to import your data from Xero or Quickbooks Online, this is a great time to get started.

First, you will be importing data into specific scenarios in Dryrun, not just connecting the app overall. By giving you the power to import specific data at the scenario level, you are able to build out an analyze your data in a straight-forward but highly customizable way.

Dryrun will import your Bills and your Invoices. It will use your customer data to create a category and the Invoice/Bill name as the item name in Dryrun. The amount will be imported and the items will be placed into Dryrun by their due date, not the issue date, since the due date (or more specifically the day the cash actually enters or leaves your bank account) is what really matters in your cash flow.

TIP: In Xero, you can add an 'Expected Date' to invoices and 'Planned Date' to bills that is separate from the due date. We recommend using these dates and predicting when you realistically think the payments to and from your account will be made. Dryrun will override due dates and use the Expected and Planned dates if you enter the data in Xero.

To import your data into your first 'Actuals' scenario, hover over the scenario title and click on the gear icon. Next, click on the icon for your accounting software and the import settings will appear.

scenario settings

Now, you can set up your import settings for this specific scenario. If you haven't authorized your accounting tool to connect to Dryrun, you will be prompted first.

You likely want both your invoices and bills to be imported so leave those two checked.

Xero Import Settings

If you've connected your bank account to your accounting app, you will see the option to import your bank balance on the first of the month and also the option to grab that balance for the day that you refresh Dryrun.

Reconciling with your bank account is a good idea but some care must be taken to keep track of items that may not have cleared yet.

Learn more about best practices of using your bank balance in Dryrun.

Working with Your Actuals Cash Flow Model

So, now you have your repeating budget in your Recurring section running alongside your bills and invoices in Payables and Receivables.

Focusing in on your bills and invoices, there are some really powerful features that will help you manage these payments.

i) Due Date Tracking

Due Date Tracking in Dryrun is turned on by default in Dryrun. This function will flag your one-time payables and receivables in Dryrun with a 'flag' when they are either unpaid or overdue.

When an item is marked as paid in Xero or QuickBooks Online then your data is refreshed, the flag will disappear, indicating that the item has been paid.

For manual items, you can mark them as paid with a quick check box on the item pop-up.

Learn more about Due Date Tracking

ii) The Bump Feature

This highly popular feature in Dryrun is turned off by default. The Bump feature will 'bump up' any overdue items to 'today' so that they are easier to track and won't be included in your cash flow when the cash has neither flowed in or out of your business yet.

Learn more about the Bump Feature

iii) Accepting Partial Payments

Dryrun is a real wizard when it comes to partial payments that are recorded in either Xero or QuickBooks Online. When a partial payment is received, Dryrun will register the payment on the date is was received and split the item up, showing the remainder that is left to be paid, on the due date.

If you are using Dryrun manually, we recommend editing the original item to the partial payment amount and date then creating a new item that contains the balance owed on the date you expect the next payment to be made.

Learn more about Partial Payments

iv) Manually moving items to reflect reality

One of the core features in Dryrun is it's extreme flexibility to deal with the complicated nature of business. You can change virtually any item at any time to model out different potential outcomes. Even items that have been imported.

But, we also know that your accounting data, in the end, is likely going to be highly accurate. So, if you make a change, let's say an estimated pay date for an item in Dryrun, then you accept a payment in your accounting tool on a different date, Dryrun will recognize the change in your accounting tool and update the Dryrun item accordingly.

What You Can See in Your Actuals

Your first scenario in Dryrun now gives you an ongoing, baseline budget to help you identify that break-even point or keep track of a baseline set of expenses (and even potentially some repeating income).

You can open up the Payables and Receivables sections to focus on key payments that need to be made, have already been made or are overdue. This helps you take action on these core items.

You'll notice, however, that only the baseline budget repeats in to the future. Your bills and invoices likely tail off in just a matter of weeks since the only variable items in your scenario are the bills and invoices that you've entered into Dryrun.

TIP: Use draft invoices and bills in Xero to build a short-term forecast in your actuals

When you look at your scenario at this point, it can be a little alarming. Your revenue likely takes a dive into the red in the near future.

That's ok, we got it handled.

First, that general end-point of your bills and invoices is a terrific early warning system to tell you when that cash flow will end. It can be the prompt to push you to finish up projects, push forward delivery, get those invoices sent, any number of actions you can take to mitigate the affects on your business.

But, there is a bevy of essential information that is in your business which will inform your future. Just because invoices haven't been sent yet, the are deals that are in various stages that will most likely turn into invoices in the very near future. There are bills that you have not yet received but you know will dropping into your inbox in the near future.

There are potential sales that are further down the road and details are more murky, but it is nonetheless highly valuable data to track.

There are plans for expansion, growth, major purchases... the evolution of your business. You can predict many of these costs to a reasonably accurate figure. But you need some way to figure out how this all will play out.

Enter the forecast scenarios.

Section II: Forecast

Now that you have your Actuals under control and can see how your current and near-term cash flow will likely play out, it's time take all of the information, knowledge, data and intuition so that you can build out a longer term forecast that will light the way forward.

By building out your forecast as a separate scenario, you can be as speculative as you need, test all sort of 'what if' scenarios and assumptions while leaving your near-term highly accurate actuals untouched and on track.

Dryrun is built around scenarios to offer you this sort of planning power. We're going to look at a typical Forecast scenario to run alongside your Actuals but once you have a handle on the process, you'll find all sorts of ways to use scenarios to your advantage and power your growth.

Building Your First Forecast Scenario

Scenarios give you the opportunity to evaluate nearly any sort of outcome you'd like to model. You can start with a completely fresh and empty scenario, but in most cases, duplicating the scenario you've created will be a terrific shortcut.

In fact, often a 'what if scenario' can simply be a duplication and changing a couple data points, ie. a due date, to see what happens to your cash flow.

But in this case, we're going to be a bit more strategic and build out a mid-term cash flow forecast that focuses on your main pinch point.

What is the key to your forecast? Is it about predicting your revenue via modelling our potential deals and sales? Potentially even taking advantage of Pipedrive to import deal data to build a powerful sales forecast?

Or is it about modelling out some major expenses that will come with expansion? Or manufacturing your next run of your product? Some large inventory purchases?

What is your core concern that you'd like to model out alongside your 'Actuals?'

Identifying the core use for this forward looking 'Forecast Scenario' will help you decide you should format things and what information you will need.

Two Cash Flow Scenarios

First Question: Include your recurring budget?

Do you want to see your Repeating budget in your forecast?

In most cases, we recommend including your recurring budget, since it will help give you that baseline break-even point alongside your forecast.

But, in some cases, it's better to start with just a clean scenario. For instance, it may be better to view your sales forecast as pure potential revenue with no expenses calculated against the projections. This is useful when you want to simply see the total value of deals you are pitching.

If you want your recurring budget in place, duplicate your Actuals scenario to use as your starting point. As noted earlier in this article, it's a good idea to duplicate your Actuals scenario once you've completed your budget so that you don't need to remove your bills and invoices.

Next Question: What is your key pinch point?

Businesses have the opportunity to forecast an extensive array of data to inform their direction and decisions, but, the key is to "start at the beginning." In other words, don't try to build the ultimate forecast from the start, rather, pick your key pinch point and model out the near to mid-term data. That will get you quick and high-value results with little effort.

Tackling a single area will also help you familiarize yourself with Dryrun and the process for building out forecasts.

A few areas that are common starting points:

i) Near to mid-term revenue

This forecast consists of the predicted invoices you will be sending out in the near to mid-term. They will often cover projects that are already under contract and even underway, but the forecast will contain expected invoices that haven't been sent out yet.

Predict the expected amount and likely pay date when you enter the items in the Receivables section in Dryrun.

Tip: After using Dryrun in this way for a number of months, it can be useful to look back and see how accurate your prediction was for the amounts and timing of the forecast.

For instance: If your timing was severely off and invoices were chronically arriving later than you predicted, it indicate issues such as slow invoicing, delayed delivery or efficiency issues.

ii) Mid to Long Term Sales Projections

A sales forecast can one of the most useful and essential forecasts in your business. Especially, if you business is always on the hunt for the next big contract. Without a significant amount of regular, recurring income, a sales forecast is key to identifying slow periods, often followed by cash flow crunches, through to periods of heavy sales that are often followed by capacity issues as the business struggles to deliver.

A frequently updated sales forecast can help predict these peaks and valleys well ahead of time, giving your business the opportunity to address proactively.

iii) Budget Forecast

In the case of a high-growth business, simply building on the baseline, recurring budget to account for additional expenses that come with growth can be instrumental to managing the growth smoothly.

In Dryrun, repeating items can be changed at any time so building out a detailed budget forecast is quick and painless.

iv) Predicting Major Expense Hits

Whether your business is driven by manufacturing product, buying inventory from wholesalers, or any number of other business models that require a major war chest of cash, you can be hit with some major expenses at the most inopportune time.

Forecasting when the heavy expenses will hit is critical for ensuring that the cash is available when it's required.

Making the Most of Your Forecasts

Once you have your two scenarios running side by side, you will naturally begin to build on them if more data is needed to give you a more in-depth picture. But initially, keep things simple. Tackle your biggest problem and keep that forecast up-to-date.

Maintaining the forecasts is much faster and easier in practice than building them out for the first time, but be aware, it's easy to let things slide when it seems like everything is moving along as planned. The big danger, of course, is that business is complicated and it's so easy to miss something critical.

Make it a weekly task, at the minimum, to review and update your forecast. It can be as quick as clicking 'refresh' and taking a quick peek at where you're headed.

This two scenario approach in Dryrun is a straight-forward and quick way to get started but will offer some insight and direction to your business that can be an absolute game changer.


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