How do you forecast cash flow from vendor contracts with variable or contingent fees?

2 Estimate the fee range

The next step is to estimate the fee range for each contract, based on the best available information and assumptions. You can use historical data, industry benchmarks, market research, or expert opinions to estimate the expected value and the possible variation of the variable or contingent fees. You can also use scenarios, sensitivity analysis, or Monte Carlo simulation to account for different outcomes and probabilities. The fee range should reflect the uncertainty and risk involved in the contract, and provide a realistic and conservative estimate of your cash flow.

3 Project the cash inflow

The third step is to project the cash inflow from each contract, based on the fee range and the payment terms. You need to align the timing and frequency of the payments with the contract milestones, deliverables, or performance indicators. You also need to consider the payment terms, such as net 30, net 60, or net 90 days, and the likelihood of late or partial payments. You can use a cash flow statement, a spreadsheet, or a software tool to project the cash inflow from each contract, and aggregate them into a total cash inflow for your business.

4 Compare with cash outflow

The fourth step is to compare the cash inflow from vendor contracts with the cash outflow from your business operations. You need to estimate your fixed and variable costs, such as salaries, rent, utilities, materials, supplies, taxes, and debt payments. You also need to account for any capital expenditures, investments, or savings that you plan to make. You can use a cash flow statement, a spreadsheet, or a software tool to project the cash outflow from your business, and compare it with the cash inflow from vendor contracts.

5 Adjust and optimize

The fifth step is to adjust and optimize your cash flow forecast, based on the comparison and your business goals. You need to identify any gaps, surpluses, or mismatches between your cash inflow and outflow, and take actions to improve your cash flow position. For example, you can negotiate better contract terms, diversify your revenue streams, reduce your costs, increase your prices, collect your receivables faster, pay your bills slower, or seek external financing. You also need to monitor and update your cash flow forecast regularly, and track your actual performance against your projections.

6 Communicate and collaborate

The sixth step is to communicate and collaborate with your stakeholders, such as your clients, vendors, employees, partners, and lenders. You need to share your cash flow forecast and assumptions with them, and explain how the variable or contingent fees affect your cash flow. You also need to solicit their feedback, input, and support, and address any issues or concerns that they may have. By communicating and collaborating with your stakeholders, you can build trust, transparency, and alignment, and achieve better outcomes for your vendor contracts.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?