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Easy Cash Flow Forecasting

July 29, 2022

Easy Cash Flow Forecasting

Ariel Gottfeld

Ariel Gottfeld

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.

What Is a Cash Flow Forecast?

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.

Benefits Of Preparing Cash Flow Forecasts

Benefits Of Preparing Cash Flow Forecasts

There are many benefits to creating simple cash flow forecasts. An accurate cash flow forecast can help businesses:

Measure Their Performance

Cash flow forecasts help businesses gauge their financial health and see if their performance is meeting expectations.

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.

Budget for Purchases

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.

Run What-If Scenarios for Planned Changes

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.

How To Calculate Your Cash Flow Projection?

How To Calculate Your Cash Flow Projection?

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.

What Should a Cash Flow Forecast Include?

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:

  • Estimated sales (to know how much income you’ll bring in)
  • Estimated payment timing (to know when you’ll get paid)
  • Estimated costs (to know how much you’ll spend)

In addition, you also need to determine how far out you want to plan for (weeks, months, etc.).

Projected Sales

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.

Projected Costs

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:

  • Fixed costs, such as your rent, salaries, etc. These are costs that are always the same.
  • Variable costs, such as utilities, supplies, raw materials, etc. These are costs that may fluctuate depending on the market or how much you earn.

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.

  • Start with your opening bank balance.
  • Add all of your cash inflows.
  • Subtract all of your cash outflows (expenses).
  • The remainder is your closing cash balance, and it will serve as your opening cash balance for the next forecasting period.

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.

How To Use a Cash Flow Forecast to Make the Right Decisions Based on the Data

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:

  • Make hiring decisions. Maybe you’re considering hiring another employee to help meet customer demand. Simply plug the employee’s salary and other related costs into your forecast to see if your business can truly afford to hire.
  • Make risky decisions. Maybe you’re considering expanding or making another risky decision. You can use your cash flow forecasts to predict how the decision will affect your weekly or monthly cash flow.
  • Adjust customer payment terms. If your cash flow forecasts and actual performance aren’t aligned, then there may be an issue with customer payments. You can use your forecasts to determine which customers aren’t paying on time and take action accordingly.
  • Predict shortages and surpluses. Cash flow forecasts can be used to predict shortages or surpluses in cash that will affect your taxes and operations. With this information in hand, you can make decisions that will reduce the risk of your business running out of cash.

Cash flow forecasts can help you make the right decisions at the right time based on accurate data.

Cash Flow Forecasting Tools

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.

Excel Templates or Software Solution?

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.

  • Excel templates are usually free and readily available, but in many cases, data is inputted manually and is a time-intensive process.
  • Software requires a learning curve, but it will typically pull data automatically from your accounting software. The process is automated, and the forecasts are accurate.

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.

Why Choose Cash Flow Frog?

Cash Flow Frog is an effective solution for easy cash flow forecasting. Create accurate cash flow forecasts automatically and take advantage of other features that help you make better business decisions.

With Cash Flow Frog, you can:

  • Create accurate forecasts and projections
  • Compare your planned vs. actual results
  • See which customers pay on time and which ones need your attention
  • Create customized reports that you can easily share with stakeholders

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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