A profitable business can still run into trouble if it doesn’t have enough cash available when bills come due.
That is why cash flow management is so important.
Cash flow forecasting can help business owners look ahead and estimate when money will come into the business and when it will go out.
You don’t need a complicated financial model to get started.
A basic cash flow forecast can provide valuable information about your business’s upcoming financial position.
What Is Cash Flow?
Cash flow is the movement of money into and out of your business.
Cash comes in through sources such as customer payments, sales, loans, or investments.
Cash goes out through expenses such as payroll, rent, utilities, inventory, loan payments, taxes, and other business costs.
The timing matters.
A business might make a sale today but not receive payment for 30 or 60 days.
The expense associated with that sale may need to be paid much sooner.
Why Profit Isn’t the Same as Cash
One of the most important concepts for business owners is understanding that profit and cash are different.
Suppose you invoice a customer $10,000.
That $10,000 may count as revenue even though the customer has not paid yet.
Your business may show a profit while having less cash available in the bank.
This is one reason accounts receivable and payment timing are important parts of cash flow management.
What Is a Cash Flow Forecast?
A cash flow forecast estimates your future cash position.
A simple forecast might look at the next 30, 60, or 90 days.
You begin with the amount of cash currently available.
Then estimate expected cash coming in and expected cash going out.
The result gives you an estimate of your future cash balance.
Start With Your Current Cash
The easiest place to start is with your current bank balance.
Next, identify expected incoming cash.
This could include:
- Customer payments
- Accounts receivable
- Scheduled deposits
- Loan proceeds
- Other expected income
Then identify expected outgoing cash.
This could include:
- Payroll
- Rent
- Utilities
- Vendor payments
- Loan payments
- Taxes
- Insurance
- Equipment purchases
Be Conservative With Your Estimates
Cash flow forecasts are estimates.
If you’re not sure when a customer will pay, it may be better to use a conservative assumption rather than assuming the money will arrive immediately.
Likewise, make sure you account for recurring expenses and known upcoming bills.
A forecast that assumes everything will go perfectly isn’t very useful.
Update Your Forecast Regularly
A cash flow forecast should not be something you create once and forget.
Update it as circumstances change.
If a major customer pays early, update the forecast.
If a customer is late, update it.
If you hire an employee or purchase equipment, update it.
The more current the information, the more useful the forecast becomes.
Watch for Cash Flow Gaps
One of the biggest benefits of forecasting is identifying potential cash shortages before they happen.
If your forecast shows that your cash balance may become too low in several weeks, you have more time to consider your options.
You might delay a discretionary purchase, follow up on outstanding invoices, adjust spending, or discuss financing options.
The earlier you identify a problem, the more options you generally have.
Use Accounting Information
Accurate accounting records can make cash flow forecasting much easier.
Your accounts receivable information can help you understand when customers are expected to pay.
Your accounts payable information can help you identify upcoming obligations.
Financial statements can provide additional information about your business’s overall financial position.
Cash Flow Forecasting Is a Management Tool
Cash flow forecasting isn’t just something accountants use.
It is a business management tool.
It can help you decide when to make purchases, whether you have room to hire, how aggressively you can grow, and when you may need to conserve cash.
For small business owners, having a clear view of the next few months can make financial decisions less stressful.
Transactions, LLC can help business owners maintain accurate accounting records and better understand their financial information.
Contact Transactions, LLC to learn more about accounting and financial reporting services.