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Cash Flow Forcast Success

Like a crystal ball for business, cash flow forecasting can help you see your company's future. We admit, this is not magic, it will not allow you to see in detail and anticipate every specific future obstacle your business might encounter along the path to success.

A cash flow forecast, however, will help you understand whether or not your business has the capital it needs to expand. In addition, it will prepare you for future emergencies and unexpected expenses, help you anticipate periods when cash on hand will be tight, and make you feel confident in knowing your business will be able to tackle any fiscal challenges which lie in wait.

If It's Not a Crystal Ball, What Is a Cash Flow Forecast?

A cash flow forecast, sometimes referred to as a cash flow projection is usually a simple spreadsheet. But it’s not an ordinary spreadsheet: a cash flow forecast spreadsheet helps you predict your company's future cash flow position.

With a cash flow forecast - you will improve cash flow management - helping you to anticipate cash inflow and outflow and the amount of cash on hand in your company at any time in the future based on anticipated income, accounts receivable, accounts payable, current cash in the bank and anticipated expenses.

It Seems Too Difficult to Forecast Cash Flow. Is it worth it?

In business, the short answer is, YES – even if your company is profitable.

Profits do not equal cash. For this reason, understanding your business's cash position at any given time can be extremely difficult without a cash flow projection.

For example, imagine you have $100,000 in sales for the current month. Your monthly expense in material cost, payroll, rent, etc. is $90,000. That means you have $10,000 in profit after one month (Way to go!). Do not celebrate yet. If one or several of your clients is slow to pay a total of $20,000, then at the end of the month you still have an outstanding receivable in this amount.

If your cash inflow is only $80,000, then your company will be short $10,000 (even with an anticipated profit). With these outstanding receivables, would your company be able to cover payroll, rent, or other operating expenses necessary to stay afloat? Probably not.

By anticipating cash flow gaps like this one, however, you can ensure your business has a backup plan (such as overdraft protection, a padded savings account, or a line of credit) or you will be able to avoid the gap all together by improving your cash flow strategy.

How to Forecast Cash Flow

As previously stated, a cash flow forecast can be as simple as a spreadsheet. This spreadsheet is typically divided into rows (to track future expenses and anticipated income) and columns (tracking months, weeks, or days depending on the period which you want to forecast). The cash flow forecasting period which you determine should be based on the nature of your company's cash flow cycle.

For example, cash payment businesses such as beauty salons receive payment every day for products and services at the time of each transaction. This means, the cash flow cycle is shorter and could be forecast monthly or even weekly.

Other seasonal businesses or companies which sell on credit have longer cash flow cycles, meaning these forecasts should extend over a longer time period, such as quarterly or annually.

When you begin a cash flow spreadsheet, you will need to:

  1. Begin with Your Current Bank Account Balance (Cash On Hand) - Start by inputting your current bank account balance, the amount of cash on hand in your company. This provides a starting figure for your forecast.
  2. Estimate Income for Each Day, Week, or Month - Forecast cash inflow figures including sales, deposits on new jobs and loan advances. Include all cash which will enter your company's bank accounts. Be sure to consider any changes which you anticipate in the future. For example, if you plan to launch a new product, you might anticipate an increase in sales and income. For seasonal businesses, remember to anticipate increases and decreases with seasonal sales. For example, if you own a gift shop, you might expect increased sales close to Christmas. If you run a hotel, look for higher sales during the peak of tourist season.
  3. Estimate When You Will Receive Payment - Billing is one thing, when you get paid is something else entirely. Consider how you will invoice and receive payment from clients. Will you be paid at the time of service or bill on a 30 or 60-day cycle? Do not list expected income on your cash flow forecast until you actually expect it to be in your bank account. For example, if you have $100 in receivables in May but payment is not due until June, then list the $100 in June's column.
  4. Estimate Expenses for Each Day, Week, or Month - Next anticipate any regular or semi-regular expenses. Regular expenses include items such as cost to deliver your products or services. This includes materials, delivery cost, manufacturing expense and  your direct employee expenses (staff salaries and payroll tax) to do the client work. You also need to forecast indirect, overhead expenses. That includes things like rent professional service fees, and office supplies. You will also want to consider any non-regular expenses you anticipate such as purchasing new equipment, taking on additional staff, and yearly or quarterly tax payments. 
  5. Update and Evaluate - As receivables come in and expense payments go out, update the original figures in your forecast to better understand your company's cash flow and to create a more accurate forecast. Evaluate how the differences in your anticipated and actual figures affect and change your business's cash flow future. Plan accordingly when you anticipate positive or negative cash flow by taking steps to improve your cash flow or making advantageous decisions regarding excess cash on hand.

To be prudent when creating a cash flow forecast, consider the nature of predicting the future. The key is understanding and recognizing that the future is uncertain. Don’t try to be precise when you predict the future. It is an inexact science.

To take this uncertainty into account, you might create three separate cash flow forecast spreadsheets: one which represents a best-case scenario, another depicting a worst-case scenario, and one which anticipates a period of average performance.

Not only will you benefit from forecasting your cash flow in all three possibilities, lenders and potential investors will also respect you as financially savvy, knowing you are aware of your company's potential range of success.

Is It Time to Outsource Your Business's Accounting? Take This Assessment

Forecasting Tools

Creating a cash flow forecast spreadsheet can seem like a daunting task. Fear not, however, there are several simple and free excel templates available online.

In addition, there are also several cash flow forecasting apps available online that can provide cash flow forecasting for your company, e.g. Floatapp.com, Pulseapp.com and EssentialCashFlow.com.

When looking for a cash flow forecasting tool for your company, you will want to consider the nature of your business, its unique cash flow cycle, expenses, and income. Look for a forecasting tool which is flexible, but also specific enough to suit your company's particular cash flow structure and forecasting needs.

If your company uses accounting software, save time by looking for a cash flow tool which integrates with your existing records to help you efficiently forecast and update figures within your spreadsheet.

You Can See the Future – So Now What?

Now that you can see your company's future, make the most of your knowledge. Use your cash flow forecast to:

  • ensure you have enough capital to fuel your company's success
  • monitor and track your company's growth
  • plan for new employees
  • shrewdly schedule new investments or equipment purchases
  • expand your workspace
  • add additional products or services
  • plan for taxes and emergency expenses
  • plan for investment
  • anticipate slow inflow periods
  • intelligently schedule taking on debt and paying it down

Maintaining an accurate cash flow forecast not only helps you stay in business, it will also help you make data driven decisions when managing your company's cash-on-hand, ensuring you make the right choices regarding investment, debt payment, and business operations.

The Perils of Operating Blind to the Future

In business, one great fear exists: failure. This fear is valid and the possibility of failure could be around any corner. In fact, most new businesses fail within the first five years of operation.

Most commonly, the reason these companies shut down is poor planning and neglecting to manage and forecast cash flow. If the owners of these failed businesses had taken the time to create, manage, update, and understand their cash flow projections, many would have foreseen upcoming obstacles, planned accordingly, and would still be operating today.

Safeguarding Your Business

If you fail to forecast your company's cash flow, your company faces the very real risk of failing. Don't let your business become a statistic; do your homework. Take the necessary steps to establish a solid cash flow forecast.

At least weekly if not daily, revisit your cash flow forecast spreadsheet to update it with actual data as projections become history. If you see a cash flow gap in the future, take the steps now to improve your company's cash flow and protect your business.

If you need help getting started, an outsourced Accountant or CFO can assist you with establishing a cash flow forecast based on your company's previous operations and show you how to keep it current.

If you are a new business with no sales or expense history, look for an accountant with experience in your industry or field who will be able to help you make reasonable projections for your company's income and expenses.

In the world of business and finance, you don’t need crystal balls or magic: cash flow forecasts are the real fortune tellers here. Take control of your company's future and start cash flow forecasting today.

The CEO's Guide to Improving Cash Flow


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