How to Create and Analyze Your Cash Flow Forecast

Cash flow forecast

Do you have enough money to pay your bills next month or next quarter? Not sure? Then it’s time to add cash flow forecasting to your planning mix.

If you can’t pay your bills, then you need to know ahead of time. Even if your business is profitable, if you run out of liquid cash, simply because the flow of cash into your business isn’t balanced by the flow of cash out of your business, you can quickly run out of cash.

For this, you need a cash flow forecast (aka a cash flow projection or cash budget).

Cash flow projection gives you a clear look at when money comes in, when it goes out and what money you are left with at the end of each month after you have paid your expenses and recorded your income.

Here are some tips for building a basic cash flow model and how some basic analysis can put those numbers to good use:

Start with Incoming Cash
Cash flow forecasting starts with input from your sales forecast (including cost of goods sold). Of course, no projection is entirely accurate, these are just estimates. Who knows if a client will pay on-time one month and late another? What if a new client in your pipeline negotiates net 60 days or extended credit? All you can make are assumptions at this point, although taking a look at trends from the past 12 months can help predict patterns.

Tackle Your Outgoings
From payroll to office supplies, utilities bills to marketing. Take some time to determine what your expenses are each month. Some may be quarterly, of course, like taxes. You’ll also have occasional expenses like new software, office furniture, vehicle maintenance, etc.

Don’t Forget Inventory
You’ll also need to review your inventory assets against your sales forecast. Ideally inventory purchases are made when the sales pipeline calls for it (and with your cash flow situation in mind).

Use Accounting Software or Pre-Baked Templates
Plug your number into a blank worksheet (SCORE offers a free 13-month cash flow projection template), alternatively you can use your accounting software to create a forecast based on data from the past 12 months and run analytical reports against it.

You’ll need to decide what your ideal ending balance needs to be each month (cash in hand) and aim to keep that number constant month-to-month.

Analyze Your Findings
Of course, you want the monthly flow of cash into your business to be greater than your out-flow. If your assumptions are right and your cash flow looks like it might be negative down the road, you’ll need to come up with a plan. This might include setting up a line of credit with your bank ahead of time or borrowing money from friends or family. Just be sure to look ahead and gauge when you’ll be cash flow positive so that you can reassure lenders that you’ll be able to repay the loan.

Your forecast can also help you plan purchases, such as the right time to make large buying decisions or whether to cut an expense.

Next time – How to Create and Analyze Your Cash Flow Statement
In our next post, we’ll discuss how you can use a cash flow statement side-by-side with your cash flow forecast. If you thought they were the same thing, think again. A cash flow statement looks at the past to report cash generated and used and compliments your balance sheet and income statement. It’s a critical financial statement and is very useful in determining the short-term viability of your company, particularly its ability to pay bills.

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Tags: Financing