When running a business, you obviously want more money coming in than going out. You can make sure of that by having effective cash management, which is also rooted in how well you can forecast your business’s cash flow. As your company’s primary decision-maker, you should start treating cash flow forecasting as more than a financial document, it’s a strategic tool that can offer insights into how you should adjust and adapt in terms of financial planning and other aspects of the business. This article will share a step-by-step guide on how to create a cash flow forecast.
Key Takeaways of How to Create a Cash Flow Forecast
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What Is Cash Flow Projection?
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Cash flow projection entails estimating your business’s cash inflows & outflows over a specific period based on past business performance.
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Key Benefits of Cash Flow Forecasting
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The benefits of cash flow forecasting include enhanced financial control, better risk reduction and strategic decision-making.
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Five Steps to Creating a Cash Flow Forecast
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Here’s a step-by-step guide on how to create a cash flow forecast that can impact how you should adjust and adapt in terms of financial planning and other aspects of the business.
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How to Use Cash Flow Forecasting for Proactive Financial Management
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With cash flow forecasting, you gain the foresight to take proactive steps to manage your finances, especially in periods when your business might face cash shortages. You can then explore financial solutions like business lines of credit, debtor finance & quick loans.
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What Is Cash Flow Projection?
Cash flow projection or forecasting involves estimating your business’s cash inflows and outflows over a certain period based on past business performance. For instance, a construction company might project increased cash inflows during peak building seasons while anticipating higher outflows for equipment maintenance during off-seasons. Similarly, a manufacturing business might forecast a surge in cash inflows around holiday seasons and plan for higher inventory levels for those times.
Simply put, cash flow forecasting is essential for predicting future cash positions. When done properly, it can positively influence how your business can prepare better for potential financial challenges or seize timely growth opportunities.
Key Benefits of Cash Flow Forecasting
Enhanced Financial Control
Regular forecasting sharpens your financial management. You improve your ability to identify potential cash flow bottlenecks, making you more proactive in planning for those issues.
Better Risk Reduction
Anticipating future cash needs greatly helps in avoiding crises like cash shortages. You will then gain greater confidence in paying your suppliers and staff on time and protect relationships that are key to business success.
Strategic Decision-Making
With more information about your business’s cash outflows and less stress worrying about where and when the cash will come in, you can make more strategic business decisions. These include deciding when is the best time to take on new projects or purchase new equipment.
Five Steps to Creating a Cash Flow Forecast
1. Select Your Forecasting Period
Choose a time frame for your forecast based on your business cycle and planning needs. You can pick quarterly or annually, but many companies select monthly. Then, analyse that chosen time frame using last year’s sales data. Look for patterns or trends in that particular period and adjust your sales forecast accordingly. For example, if you run a niche business like a ski equipment manufacturing company, you might notice higher sales before the colder months. Use this information as an anchor to predict similar trends for the upcoming year.
If you’re running a startup that lacks historical sales data, focus initially on estimating all cash outflows. This initial approach helps determine the minimum revenue required to sustain business operations. Remember that sales figures are not static and can fluctuate due to different factors, including your customer base’s payment habits, economic changes, and actions & strategies employed by your competitors.
2. Estimate Incoming Cash
Assess your expected income, including sales and receivables. Use historical data and market analysis to form realistic income projections for your chosen timeframe. Once you have done that, break those projections down into smaller details. For example, specify projected dates when the cash is expected to be collected from outstanding invoices. Those details can make cash flow forecasting more efficient.
Moreover, look at other possible cash inflow sources, such as tax refunds, government grants, specific asset sales and investors adding equity to your business.
3. Project Outgoing Cash
List all anticipated expenses, including operational costs, salaries, and capital expenditures for your chosen timeframe. Also, include periodic payments covered in that timeframe, like quarterly tax instalments and business loan repayments.
In your cash outflow forecast, it’s also crucial to accurately determine the costs associated with making your services or goods available for the chosen period. This includes the direct costs of materials & production and any associated operational expenses. Understanding these costs clearly, you can more effectively adjust your sales projections. For instance, if you initially anticipated selling five units in March but ended up selling ten, having a detailed breakdown of the cost of goods sold allows for a more precise adjustment in this year’s forecasting. This ensures your cash outflow estimations remain aligned with actual business performance.
4. Map the Timing of Cash Inflows and Outflows
Accurately mapping the timing of cash inflows and outflows is crucial. Start with an opening bank balance or your actual cash on hand. Then, add all the projected cash inflows and deduct cash outflows for your chosen forecasting period. The result of that calculation will be your closing cash balance for that specific timeframe, which will also be the opening cash balance for the next forecasting period.
With this step, you can identify periods of cash surplus or deficit. That information can empower you to adapt and achieve better liquidity management.
5. Review and Revise
Update your forecast regularly with actual figures to maintain its relevance and accuracy. This practice helps in fine-tuning future forecasts, helping you discover more potential cash gaps or excesses. Then, you can adjust your future forecasts and operational strategies, such as delaying a major purchase or accelerating a sales campaign, to optimise your business’s current and projected cash flow.
How to Use Cash Flow Forecasting for Proactive Financial Management
With cash flow forecasting, you gain the foresight to take proactive steps to manage your finances, especially in periods when your business might face cash shortages.
Other than delaying your plans of expanding to a new location or slashing your marketing budget, you can also leverage financial tools to address anticipated cash flow gaps. Explore cash flow lending solutions like business lines of credit, which can provide access to funds you can draw upon as needed, ensuring you have enough capital to maintain business operations during cash-strapped periods.
You can also explore debtor finance, which helps turn unpaid invoices into cash. That’s especially beneficial if your cash flow forecasting is able to identify debtor patterns, like projected delayed payments or projected increases in growth, that can strain your cash flow. Also, some issues or events can’t be forecasted. You can rely on fast business loans to provide immediate cash relief and address those unexpected expenses. Just make sure to include repayments for those loans in your next forecasting period.
Learn More About Cash Flow Lending Today
If you want to learn more about cash flow loans and their role in your cash flow forecasting, reach out to Dark Horse Financial. We’re here to help you explore financial solutions to improve your cash flow management and prepare better for anticipated cash-strapped seasons. Give us a call today for a quick consultation.
