New Year’s Resolution #1: This January I WILL do a Cash Flow Forecast for my business!

(January 8, 2019)  By Nicki Parr, WEV’s Business Recovery Specialist

It is the start of a new year and a time to look forward with hope and optimism for the next 12 months. 2018 was a challenging year for many of us on many levels but you can reflect upon the fact that you are still here, one year older and one (light) year wiser, having survived those challenges.

So what are your goals for 2019? Are you planning to grow your business? What new revenue opportunities might you seek out? These questions can affect your revenue and expenses which means…it’s a perfect time to sit down and do your cash-flow forecast for the year ahead.

Now I KNOW that this is not your favorite subject – in fact, it is probably as painful to think about as a trip to the dentist. But like going to the dentist, it is a necessary step for your health…as a small business owner.  I want this to be as clear and pain-free a process as it possibly can be, so that you come to appreciate how useful a cash-flow forecast can be, as a map towards 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 a business and goes out of a business. The cash that is left 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 go bankrupt because of wonky cash-flows which leave it short at critical moments.

If you could anticipate when some of these wonky moments were to occur, and prepare for them BEFORE they occur (e.g. through 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 do 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 (or search “best cash flow template” to find one online). There are four basic steps:

  • Decide how far you will plan into the future
  • Estimate your sales, and other cash in-flows
  • Estimate your costs, and other cash out-flows
  • And, most importantly, estimate WHEN you will receive or pay money

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.

It is important to realize that sales and expenses are not your only forms of cash flow. Other examples of cash inflow include a loan advance, an owner’s contribution or investment, and proceeds from the sale of business equipment. Other examples of cash outflow include loan repayments, owner distributions and asset purchases. Basically, it is any transaction that hits your business bank account.

There will be five primary categories of numbers on your forecast:

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

Once you have decided 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 dependent on sales.

However, it is critical in a cash flow forecast to record when the payments are actually made to a supplier for 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 can be especially hard for new businesses with no credit history and no bargaining power – a supplier will require you to pay straightaway but a big customer could take their sweet time in paying you.

You have to be able to anticipate these cash-flow gaps and take appropriate action to avoid them in advance. It is also important that you remember to add in periodic or annual payments, such as 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 current month, and similarly onwards into the future months…you don’t necessarily start at zero dollars each month.

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, and be ready to do something about it, rather than wishing it would miraculously go away? Don’t throw out the notion of doing a cash-flow forecast because you don’t like the numbers it is producing – instead be mobilized into action to grow your sales, trim your overhead…. and make 2019 your best year yet!