Cash flow is an important measure of a business’s financial health. Without cash, a business can quickly become insolvent. One of the simplest and most effective ways to manage a business’s cash flow is through easy cash flow forecasting.
With an accurate cash flow forecast, you can determine whether your business will run out of cash or is on the right track to meet your goals.
A cash flow forecast estimates the flow of cash coming in and out of the business over a specified period of time.
Accurate cash flow forecasts can help a business predict its future cash position and take action now to prevent cash shortages in the future. Forecasts also help businesses estimate their income and expenses during the covered time period.
While cash flow forecasts typically cover a 12-month period, they can also be used for shorter periods of time, such as a week or month.
There are many benefits to creating simple cash flow forecasts. An accurate cash flow forecast can help businesses:
They allow you to compare your actual income and expenses with your forecast to see where your business is under or overperforming. With this information in hand, you can make changes to get your business’s performance back on track.
If your business plans to purchase new equipment or invest in growth, a cash flow forecast can help you determine when you will have the cash to carry out your plans. Alternatively, forecasts can help you decide whether a loan would be the better option to fund your purchase.
Cash flow forecasts allow you to create what-if scenarios to see how planned changes or decisions will affect your business.
For example, you can see how hiring a new employee will impact your cash flow. Simply add the costs of hiring and retaining the employee (salary, training, benefits, etc.) to see how it will impact your business’s financial position.
Additionally, you can also run what-if scenarios for worst-case scenarios to see how your company will fare if business is unexpectedly slow.
Now that you understand what a cash flow forecast is and its benefits, you may be wondering how to do a simple cash flow forecast. Preparing a cash flow forecast is simple and straightforward.
Let’s look at what should be included in a forecast.
If you want to learn how to construct a simple cash flow forecast, you need to know what a typical forecast includes. The three key elements to include in a forecast are:
In addition, you also need to determine how far out you want to plan for (weeks, months, etc.).
Every cash flow forecast should include projected sales for the covered time period. The simplest way to estimate sales is to look at your sales history. Make a note of slow periods, busy seasons and promotions to ensure that your estimate is accurate. Additionally, you’ll need to consider any decisions or emerging trends that may impact your sales.
Estimating sales can be tricky for new businesses. In this case, you will need to use data from competitors and suppliers to make predictions.
Projected Payment Timing
Estimating your sales for the forecast period is just one part of the process. It’s also important to estimate when you’ll be paid.
It may take weeks or even a month or more to get payments from some customers, so keep this in mind when creating this estimate. Again, you can use your sales history and bank statements to accurately estimate when you’ll be paid for sales.
Of course, every cash flow forecast should also include projected costs for the covered period. You can use your expense history to determine how much you’ll spend during the period. If you have new planned expenses, it’s important to include these in your forecast.
Expenses should include:
Make sure that you include all expenses when estimating your costs to keep your cash flow forecast as accurate as possible.
Once you have all of this data, it’s time to plug it into your cash flow forecast.
After creating your forecast, make sure that you go back and compare your actuals to the estimates in your forecast. Comparing the two will help you gauge your business’s performance and determine whether you need to make improvements.
You now know how to produce a simple cash flow forecast, but how can you use your forecasts to make smarter business decisions?
Cash flow forecasts can help you:
Cash flow forecasts can help you make the right decisions at the right time based on accurate data.
Creating cash flow forecasts is a straightforward process, but going through all of your income and expenses can be time-consuming. The right tools can help you create forecasts quickly and easily.
Tools can save you time, but which one should you choose? For most businesses, it comes down to using an Excel template or a software solution.
Both options have benefits and drawbacks.
While it often comes down to personal preferences, many businesses find that it’s quicker, easier and less stressful to simply use a software solution like Cash Flow Frog.
With Cash Flow Frog, you can:
Best of all, Cash Flow Frog integrates with the accounting tools you’re already using, allowing you to create accurate forecasts automatically whenever you want.
Cash Flow Frog is a complete software solution for all of your cash flow needs.
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