The Power of Cash Flow Forecasts

June 6, 2023

All owners understand the #1 rule of business – don’t run out of cash! But this is often easier said than done. One method of getting a better handle on your business’s cash flow is by creating a forecast.

Here’s a look at what a cash flow forecast is, the benefits of having a forecast, and the information needed to create this report.

The basics

A cash flow forecast shows an estimate of the cash coming in and going out of your business over a certain period of time.

The time frame covered by the report can be whatever makes sense for your business (i.e. weekly, monthly, bi-monthly, quarterly, or annually). What’s best for your business often comes down to what cash worries drive your need to make decisions.

One of the more popular formats is a rolling twelve-month forecast that allows a business to account for a full cycle of any seasonality in addition to large, single or periodic cash outlays.

The benefits

• Identify cash bottlenecks. Maybe you have a group of customers habitually making late payments, or your inventory is not turning quickly, so it is not turning back into cash quickly enough. A cash flow forecast can help you identify bottlenecks like these that prevent cash from flowing back into your business.
• Budget for future payments. Large payments typically loom for every business, such as an annual insurance bill or making quarterly estimated tax payments. Other businesses know they have large inventory purchase requirements leading into the holidays. A cash flow forecast can help you set aside enough money to pay your monthly, quarterly, and annual obligations.
• Prepare for low revenue months. For businesses who are seasonal or don’t earn their revenue evenly throughout the year, a cash flow forecast can help ensure that you’ve got enough money to pay the bills during cash flow negative months.
• Requested by many outside parties. Bankers, shareholders, investors, and other outside parties may request a cash flow forecast in addition to a balance sheet, income statement, and statement of cash flows. A cash flow forecast can be a big help in determining when to ask for a line of credit, often best done when it doesn’t look like you need it!
• Project appraisal and business planning. A cash flow forecast lets you calculate multiple business scenarios and assess whether a particular project would be worth pursuing. Consider running at least three scenarios – a best case, a worst case, and one case in the middle.

Building the forecast

A cash flow forecast starts with your income statement. You then adjust the income statement by pulling out non-cash items like depreciation and amortization to get operational cash. Next, track changes in cash inflows and outflows from your balance sheet accounts to get a cash balance for the period. Then take the monthly cash change and see the cumulative effect over time.

By forecasting out future periods, you can easily see when your business will have excess cash and when you might be in a negative cash position…long before it occurs!

Please call if you’d like help creating a cash flow forecast for your business.