How to Do Cash Flow Forecasting in Xero

Edgar de Wit

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Cash flow forecasting is essential for managing your business finances and planning for the future. It involves predicting the inflow and outflow of cash over a specific time, typically a month or a quarter.

Xero, a popular cloud-based accounting software, offers a cash flow forecasting feature that allows you to create and manage your cash flow forecast within the platform. That sounds great, but it also has its limitations.

In this article, I'll explain the importance of cash flow forecasting, and how you can do it effectively.

The Need for Cash Flow Forecasting

We're seeing a clear difference in forecasting before and after Covid.

Before Covid, companies mainly forecasted their profit & loss. Not much attention was given to the balance sheet, let alone cash flow.

But Covid quickly changed this. Companies now want to be on top of their cash flow, and focus on their free cash flow from operations.

During that process, CFOs often notice that their current methods are time-consuming and tedious.

Since Covid, we have noticed that the need for cash flow forecasting has really become an essential requirement rather than a nice-to-have feature.

By accurately predicting incoming and outgoing cash, companies can effectively plan for both short-term obligations and long-term growth strategies.

But the challenges for CFOs and controllers are numerous. Manually collecting and maintaining spreadsheets, and calculating the outcome, is tedious. Typically, spreadsheets become more fragile, and less understood, as time passes by.

When you work with Xero you have two other options: you work with Xero's Short-term cash flow or you use a cash flow app.

I'll review them both.

Xero's Short-term Cash Flow Projections

Xero has an option to display your short-term cash flow projection forecasts. This is possible for the next 7 or 30 days. You can indicate which bank accounts you want to include in your projection.

To calculate the cash flow, Xero uses future one-off or repeating invoices and bills.

The cash flow dashboard does have some limitations. It does not include payroll expenses, credit notes, transfers, batch payments, and batch receipts.

With their Plus license, you can increase the projection to 90 days.

If you want to know more about Xero's Short-term cash flow projection, read their website.

Integrating Xero With Cash Flow Forecasting

But projection alone is not enough. You also want to know how your cash flow is actually doing in your company, and compare it against your forecast. And you also want to know a consolidated cash flow.

Xero offers enough cash flow forecasting apps in their app market to close this gap.

Our platform XLReporting is one of them.

The advantage of integrating with an app is that it combines the best of both worlds. Xero is good at keeping track of your administration(s) and the app does your forecasting based on that.

The way the forecasting is done differs per app. Some cash flow apps offer 3-way forecasting (P&L, Balance, and Cashflow) and others consolidate in a more limited way.

Each app easily connects to Xero and retrieves the necessary information.

The big difference is in the way of forecasting. Or rather, the method of forecasting that the app has chosen for you.

Almost all cash flow forecasting apps enforce their own planning method. In other words, you conform to their method or you have to look for another solution.

We call that a "boxed" solution: you receive a readily-configured solution "out of the box".

As I already mentioned, integrating with Xero is easy. You choose an app from the app store and click Sign now. You create an account and use your Xero credentials to give the app access to your administration.

Depending on the app, you will be asked whether you want to map your chart of accounts once or if the app should follow its own mapping.

How to Start With Cash Flow Forecasting

Our XLReporting app is also intended for cash flow forecasting. Just like with most solutions, you start with a predefined configuration.

We call this Essentials.

This name was chosen for a reason, because, from our experience, it contains all the essential reports and models for complete 3-way forecasting plus cash flow forecasting.

The steps to get started are easy

Step 1: Create an XLReporting Trial account. You can try it out for free for 14 days.

Step 2: After creating an account, you can start right away.

Step 3: Follow our Getting Started, and within 5 minutes you will know how XLReporting works, and your actuals have been imported..

Step 4: After importing, XLReporting knows your organizational structure and reporting structure. And you are ready to forecast!

XLReporting offers Planners for this goal.

Planners are online input models that each handle a budget section.

You'll have a Revenue Planner for forecasting your turnover, a Staff Planner for personnel costs, and an Asset Planner for your investments and fixed assets, and so on.

Planners are ideal for dividing and delegating your budget process. And you can do that by giving permissions to your users.

If you want to view a cash flow forecast, open the Cashflow Forecast model. You use this model to plan your forecast 12 months in advance.

Conclusion

Cash flow forecasting is an essential part of any business. But it's also something that needs to be done regularly. That's why integrating with Xero is so important.

With the right app, you can easily create accurate cash flow forecasts that take into account your actual data from Xero.

However, it's important to understand that each app has its own forecasting method, so it's important to find one that aligns with your business needs.

XLReporting is a great way to forecast your cash flow in Xero, as it offers pre-configured models that are easy to use and can be shared with other users for a more collaborative forecasting process.

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