Everyone will agree that cash flow is important for any business. Your business can only stay afloat if it has enough cash on hand, at the right time. Regardless of how good your sales are or how good your profit margins look on paper, you risk failing if you run out of money. That’s not because you aren’t making money, but because you don’t have enough cash flow to keep going.
One of the best ways to avoid this problem is to make a cash flow forecast. It helps you see, control and feel confident about your financial future, and gives you adequate time to take action if your cash flow appears to be slowing down.
What is a Cash Flow Forecast?
A cash flow forecast is an estimate of how much money will come into, and go out of, your business over a certain amount of time. It shows how much money you think you’ll make, how much money you think you’ll spend, when those things will happen, and how much cash you’ll have left at the end of each period. It looks at cash movement, not accounting profit, which is key. You could record a sale today, but if the customer doesn’t pay you for 30 or 60 days, you won’t have that money available to pay your bills. This difference in timing is taken into account by a cash flow forecast.
The Difference Between Cash Flow and Profit Matters
One of the most common mistakes business owners make when it comes to money is thinking that profit is the same as cash. Profit is the difference between your income and your expenses over a certain amount of time, whereas cash flow tells you if you have the money you need, when you need it. A business can be making money and still have cash flow problems because of customers who pay late, high upfront costs and tax payments being due before cash is collected. A cash flow forecast shows these gaps and helps you to avoid any surprises.
What’s the Point of a Cash Flow Forecast?
A cash flow forecast allows you to stop reacting and start planning ahead. You can see problems coming in advance, and do something about them before they have a negative impact.
Stop Cash Shortages
By predicting your cash flow, you can pinpoint times when your expenses are higher than your income. This gives you time to follow up on unpaid bills, change the terms of payment, and cut back on unnecessary spending.
Better Financial Decisions
With a cash flow forecast, you can make better financial decisions, because you know exactly how much money you’ll have in the future. This makes it easier to confidently decide to bring on new employees, spend more on marketing, buy tools and take on new projects. You don’t need to guess, and you can make financial decisions based on facts.
Boost Business Growth
Before growth can happen, a business usually needs money. A cash flow forecast can tell you if your business can handle growth, or if it needs more money to do so.
Gain Stakeholders’ Trust
Lenders, investors and business partners usually want to see a cash flow forecast, and it’s a good way to gain trust. A cash flow forecast shows that you know how to handle your money and are operating responsibly.
Reduce Stress and Doubt
Knowing how much money you will have in the next few months gives you peace of mind and takes away a lot of the stress that comes with having to make business decisions at the last minute.
How to Make a Simple Cash Flow Forecast
You don’t need to know a lot about accounting or buy expensive financial software to make a cash flow forecast, as much of cash flow forecasting can be done with a spreadsheet.
Choose the Timeframe for Your Forecast
You need to pick a cash flow timeframe that works for your business. Weekly forecasts are helpful if you don’t have a lot of money, or if your sales change a lot. But, most SMEs do well with monthly forecasts. If you’re new to making predictions, start by making a monthly one for the next few months, and consider extending that timeframe as you go on.
Determine How Much Cash You Have on Hand to Start
The amount of cash your business has on hand at the start of the forecast period is called your opening cash balance. This includes balances in bank accounts and money in hand. This number is the basis for your forecast, so make sure it’s correct.
Make an Estimate About Cash Inflows
Cash inflows are all the different ways that money flows into your business. This includes payments from customers, cash sales, money from loans, contributions from you as a business owner, money from grants and refunds. You can use historical data to make estimates when possible, but be realistic and cautious. You don’t want to overestimate inflows.
Make an Estimate About Cash Outflows
Cash outflows are all the costs your business has to pay, including rent or lease payments, salaries and fees for contractors, supplier bills, internet and utilities, insurance, subscriptions for software, marketing, loan repayments and tax. You need to include both fixed and variable costs, as well as costs that happen only once a year or at random times, like buying new equipment.
Figure Out Your Net Cash Flow
You can figure out your net cash flow for each period by taking your total cash outflows, and deducting it from your total cash inflows. The figure you’re left with is your net cash flow, which is the cash you have to work with.
Find Cash Flow Gaps and Risks
Once you’ve finished your cash flow forecast, take a close look at it to find times when cash balances get dangerously low and months with a lot of expenses. It’s also a good idea to identify times when you’re depending on a small number of big payments. This analysis lets you take action and stop cash flow problems before they happen.
Regularly Check and Update
A cash flow forecast is a document that changes over time, so be sure to keep it up to date. Replace estimates with real numbers when you have them, note any changes in sales forecasts and add any new costs that come up.
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Everyone will agree that cash flow is important for any business. Your business can only stay afloat if it has enough cash on hand, at the right time. Regardless of how good your sales are or how good your profit margins look on paper, you risk failing if you run out of money. That’s not because you aren’t making money, but because you don’t have enough cash flow to keep going.
One of the best ways to avoid this problem is to make a cash flow forecast. It helps you see, control and feel confident about your financial future, and gives you adequate time to take action if your cash flow appears to be slowing down.
