Create a Cash Flow Forecast for Your Business

Did you know that 80% of all small businesses fail because they run out of cash? We don’t want your business to be one of those statistics. So, if you want to grow your business in a sustainable way and achieve long-term success, sitting down to do a cash-flow forecast is critical.

Now we know this is probably not your favorite subject – for many of us it is as painful to think about as a trip to the dentist. But, like going to the dentist, cash-flow forecasting is a vital step for your health… as a small business owner.

We want to help make cash flow forecasting as clear and pain-free as possible so that you can focus instead on how useful that forecast is as a map toward your success.

What exactly is a cash-flow forecast and why does it matter?

A cash-flow forecast records all the cash that comes into and goes out of a business. The cash that is left in your business account at the end of the month is not the same as your net profit. It can actually be wildly different, and a business that has a great profit margin may still run out of cash because of wonky cash-flow timing. This can leave you short on cash at critical moments.

If you could anticipate when some of these wonky moments were to occur and prepare for them before they occur (by obtaining some additional financing, cutting expenses, getting your customers to pay you quicker, delaying when you pay your vendors, etc.), then your cash-flow fluctuations will have less impact on whether your business fails or succeeds.

How to create a cash-flow forecast

Ideally, you create this in a spreadsheet but even if you only write it out in pencil on paper, that is better than not doing it at all. One of the easiest ways to get started is to search “best cash flow template” to find and download one online.

There are four basic steps:

  1. Decide how far you will forecast into the future.
    • 12 months is the typical length of time to forecast – it can get tricky to map things out too much further as markets and environments change. Deal with each month separately in your forecast.
  2. Estimate your sales and other cash in-flows.
    • It is important to realize that sales are not your only forms of cash inflow. Other examples of cash in-flow include a loan advance, an owner’s contribution or investment, and proceeds from the sale of business equipment.
  3. Estimate your costs and other cash outflows.
    • Keep in mind that expenses are not your only forms of cash out-flow. Other examples of cash outflow include loan repayments, owner distributions, and asset purchases.
  4. And, most importantly, estimate when you will receive or pay money.

In steps 2 and 3, if you aren’t sure whether something makes the cut for your forecast, the basic rule is: include any transaction that hits your business bank account.

Types of Cash Flow

There are five primary categories of numbers on your forecast:

  1. Income (separate out the main revenue streams)
  2. Cost of Goods/Sales
  3. Operational Costs (things like payroll, rent, utilities, insurance, etc.)
  4. Asset/Equipment Purchases (any large one-off purchases of assets)
  5. Loan drawdowns and repayments

Once you have decided on the level of detail for your income and forecasted what your sales will be each month (based either on past trends or some reliable research), you will need to enter the cost of sales. These are the costs that are directly related to sales.

For example, if you sell cakes, your cost of sales will be the cost of the different ingredients and the manufacturing process in one month for making cakes. You may sometimes hear these types of costs referred to as “variable” costs because they vary depending on sales.

Anticipate Timing and Cash-Flow Gaps

It is critical in a cash flow forecast to record when the payments are actually made to a supplier for the cost of sales/variable costs. This is where businesses can get stuck in a cash bind: more often than not, you are having to pay your suppliers in advance of when you are getting paid by your customers for your sales.

This is especially hard for new businesses with no credit history and no bargaining power – a supplier will require you to pay straight away, but a big customer could take their sweet time in paying you.

You must be able to anticipate these cash-flow gaps and take action to avoid them in advance. Remember to add in periodic or annual payments as well – quarterly sales tax remittances, and annual insurance dues – to ensure you have sufficient cash on hand to pay them when they fall due.

Finally, don’t forget to carry forward any cash excess or cash shortfall from the previous month into the next month, and similarly onwards into the future months…you don’t necessarily start at zero dollars each month.

Forewarned is Forearmed

Approaching the cash-flow forecast as a vital piece of business information for you to run your business may require a mental shift. But be honest with yourself, wouldn’t you rather know in advance if you were predicted to run out of cash in month 6, so that you can be ready to do something about it, rather than wishing it would miraculously go away?

Don’t throw out the practice of doing a cash-flow forecast because you don’t like the numbers it is producing; instead, take action to grow your sales, trim your overhead, and make the coming year your best yet!


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