Take Control of Your Cash Flow with Forecasting

Growth ChartCash is the fuel for your business – you can’t operate without it! Cash flow forecasting is by far the most important cash management tool for business. It can be a daunting process, but taken step-by-step, the result will be invaluable in not only guiding your way to success, but measuring your progress.

Where Do I Begin to Prepare a Forecasted Cash Flow?

Initially keep 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.

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: “how and when is the sale converted to cash?” Develop a spreadsheet for forecasting the time of cash from sales since it is the main source of cash flow.

  • Is cash received at the time of sale or is there a timing difference?
  • If you sell on account, when is cash actually received?
  • What percent of receivables are never collected?

Similarly go through all the other sources of cash and understand the timing of receipt of each.

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. If yours is a service business, then understanding the timing of payments to employees and subcontractors is critical. Owners of service businesses may be surprised by the amount of cash expended before receipt of payments from sales.

Putting It All Together

After creating a clear picture of Cost of Goods Sold, each operating expense should be reviewed in terms of its timing. Then 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 payable
  • Credit card payments
  • 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. This allows for review of the projected cash balance to project future shortfalls, allowing your business to take action to mitigate such circumstances.  You need at least a three month cash flow by week, prepared monthly, and a twelve month cash flow forecast as part of the annual operating budget.

After preparing the first cash flow forecast there is typically a change in how the business operates, from a cash flow perspective, because of the insights gained in understanding how cash moves in and out of your business. 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. For more cash flow tips, check out my related article at dryrun.com.

Rick Arthur

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.