How to Create a Cash Flow Forecast

Preparing a cash flow forecast helps a company avoid making bad financial decisions. If you’ve never created one of these forecasts before, you’re missing out on a crucial way to use data and financials to understand the health of your business.

If you don’t run forecasts, you may make decisions that will negatively impact the future of your business.

Why is a cash flow forecast important?

The importance of a cash flow forecast can’t be understated. Why? If you have an accurate forecast of your cash flow, you’ll be able to determine whether:

·         You need cash to pay off debts and obligations

·         You’re running out of money

·         Cutting back on overhead is necessary

·         It’s viable to invest in new products or expand to new markets

Some of the critical benefits of cash flow forecasts include knowing when it’s time to generate new sales, whether you can afford to recruit new staff members and what direction your business can take right now.

Five steps to a simple cash flow forecast

If you want a fast and easy way to create a cash flow forecast, utilizing a Xero cashflow app add-on, such as Cash Flow Frog, can help you make sense of your financials.

Forecasting cash flow and scenario planning empowers you to make smarter business decisions that are backed by strong financials.

However, even if you use cash flow forecast software, you should know the steps you need to take to generate your own forecast.

1. Decide how much you want to plan for

The longer the forecast, the more intense the process will be. Cash flow planning can be for a few weeks or many months. You want to take the time to know how much you want to plan for based on your contracts and sales agreements.

Perhaps your sales pipeline is filled for the next six months. In this case, you can accurately forecast your cash flow for this period.

However, new businesses don’t have the underlying data needed for long-term forecasting. In this case, you might need to forecast for a few weeks or a month. The longer the forecast period, the less accurate the cash flow figures will be.

2. Calculate all your income

Ready to forecast? You’ll need to list all of your:

·         Sales

·         Cash in the bank

Cash flow only considers when the cash is in your bank and can be leveraged. If your invoices are paid on net30, you need to account for this so that you know what your cash flow will be and when.

Add up all of these figures to know your net income.

You need to consider all sources of income, even if it falls into the “other” category.

3. Prepare a list of ‘other’ estimated cash inflows

Cash inflows won’t just come from the sales that you make. Determining your true net income will require you to take the previous figure and then prepare a list of estimated cash flow, which may include things like:

·         Tax refunds

·         Rebates

·         Grants

·         Royalties

·         Loans

You need to sit down and truly analyze the potential, other income that is coming into your business. If you’re not 100% sure about these figures, work with an accountant or financial specialist who will help you narrow down the additional sources of income that you can expect.

4. Calculate all your expenses

Unfortunately, net income doesn’t include all of your business’s expenses. You need to consider weekly and monthly expenses, including:

·         Taxes

·         Salaries

·         Rent

·         Utilities

·         Payroll

·         Loan fees

·         Materials

·         Etc.

You must add up all of your expenses to calculate your cash flow accurately.

5. Anticipate Your Cash Flow

Finally, you have all of the figures you need to come up with your cash flow forecast. You’re going to want to create an outline that includes weekly and monthly forecasts. In each of these columns, you’re going to take your net income – expenses to properly calculate your cash flow.

Hopefully, your cash flow is positive.

If your cash flow is negative, you should use these figures to reduce expenditures or to justify injecting more money into your business.

Cash flow forecasts need to be updated often, but they can provide you with a real-time pulse on your business’s health. Once you have forecasts available, you can make smarter decisions for your business.

About Carson Derrow

My name is Carson Derrow I'm an entrepreneur, professional blogger, and marketer from Arkansas. I've been writing for startups and small businesses since 2012. I share the latest business news, tools, resources, and marketing tips to help startups and small businesses to grow their business.