How to Create Your Most Important Cash Management Tool

cash-flow-piggy-bankCash flow forecasting is by far the most important cash management tool for business, yet few take the time to develop a regular and meaningful cash flow forecast. Granted, it can be a daunting process. But taken step-by-step, with lots of input from your team, the result will be invaluable in not only guiding your way to success, but measuring your progress.

Every day, cash is flowing through your organization….money in/money out. In most organizations without a CFO, there is no one person responsible for or able to identify this flow of money. Since input is required from a number of people in your organization, it is difficult for most accountants to prepare a meaningful cash flow forecast. The thought process is much different from keeping the books.


Where Do I Begin to Prepare a Forecasted Cash Flow?

Begin by keeping the forecast very simple, then develop detailed calculations over time. Consider cash as either coming in– “Source” –or flowing out– “Use.” As a starting point, review current financial statements and operating budgets. In small businesses, the forecasted cash flow has most often not been developed because operating budgets are non-existent.

Identify Sources

Collect data by identifying all “Sources” of cash. Typically, these sources are easily identified and include:

  • Sales
  • Deposits
  • Collections of accounts receivables
  • Note receivable payments
  • Capital injections
  • Loan proceeds

Review sales projections to ensure they’re realistic then ask the question: “how and when is the sale converted to cash?” Typically, developing a spreadsheet for forecasting the time of cash from sales is most challenging, and yet most important, because it is the main source of cash flow.

  • Is cash received at the time of sale or is there a timing difference? Even with e-commerce sales there is a two-to-three-day timing difference plus payment of the merchant account fees before cash is received.
  • If you sell on account, how long does it take on average to collect? Again, when is cash actually received?
  • What percent of receivables are never collected?

If you don’t understand how cash flows from sales, then forecasting is very difficult.  Similarly go through all the other sources of cash and understand the timing of receipt of each one.

Identify Uses

To forecast the “Use” side, start with a review of the Income Statement starting with the Cost of Goods Sold section. If yours is a product based business there must be a clear understanding of how inventory is purchased, processed and delivered. Similar to sales, this is typically the most challenging area yet most important because it is typically the largest use of cash in the business. If yours is a service business, then understanding the timing of payments to employees and subcontractors is critical. Many times, owners of service businesses are surprised by the amount of cash expended before they receive payments from sales.

Putting It All Together

When preparing the forecasted cash flow the first time, there is almost always a change to how the business operates in the future, from a cash flow perspective, because of the insights gained in understanding how cash moves in and out of your business. After creating a clear picture of Cost of Goods Sold, each operating expense should be reviewed in terms of its timing. The next step is to review the Balance Sheet of both assets and liabilities to determine additional cash outlays expected in the future such as: purchase of fixed assets, sales of fixed assets, payment of accounts payables, credit card payment, loan payments, dividends or distributions to owners.

A forecasted cash flow should include both a summary sheet and detail sheets for each Source and Use line which provides space to document assumptions. The last section of the forecasted cash flow provides a running balance of the projected cash balance, based on these sets of assumptions. You will likely never achieve 100% accuracy, but this allows for review of the projected cash balance to project future shortfalls, allowing your business to take action to mitigate such circumstances. In many years of running my own business, projection of shortfalls along with an accurate cash flow forecast enabled determining and communicating to my team where our focus needed to be.

Cash is the fuel for your business…you can’t operate without it! 

How often should you prepare or update your forecasted cash flow? The answer is based on what current cash flow tells you. If cash is tight and there are projected shortfalls, I recommend a six week cash flow by day, prepared weekly. In any case, you need a three month cash flow by week, prepared monthly. And, of course, a twelve month cash flow forecast should be prepared as part of the annual operating budget.

There’s a lot to know when it comes to forecasting cash flow. But once you’ve done it you’ll wonder how you ever operated without this invaluable tool. Still have questions? Contact me for a complimentary consultation.


Written by

Rick Arthur is a CFO whose expertise is built on Financial Intelligence and 35 years in senior financial roles. Coupled with a CEO’s perspective and the experience of building his own $20 million company, he brings a unique depth of insight into business from the top down. Wired to get to know people, Rick works hand-in-hand with business owners of intentional, growth-oriented companies, solidifying relationships as a trusted advisor and confidant to his clients. He leverages his experience to help business owners gain traction and stay laser-focused on the company’s vision, cash flow, and profitability – all while creating big picture solutions for strategic planning, growth and sustainable success.