Projecting cash flow is a critical aspect of planning for a business of any stage or size. Consistently reviewing the timing of cash receipts and upcoming cash outflows will help founders make better decisions both short term and long term. The purpose of this blog is to walk through the basic purpose and form of consistently forecasting cash flow.
One key element in cash flow forecasting is determining the duration of your forecast and the length of each time period covered. Each time period should be its own column in your spreadsheet.
- Weekly Forecast: Weekly forecasts are all about liquidity, helping founders ensure they keep their cash balance above zero while also giving them tactical options, if needed, to strengthen their cash position; for example, delaying payment to a vendor for a week if cash is short.
- Monthly Forecast: Monthly forecasts are better for medium to long-term strategic planning. This can help founders decide when they can hire a new, key employee or anticipate when they will need to raise more capital.
Your cash flow forecast will start with your opening cash balance for each period. Next, there are two key sections of the cash flow forecast: Sources & Uses of Cash. Outlined below are some of the key pieces of each section, but this is not an exhaustive list.
The Sources of Cash section lists money coming in; it consists of all incoming cash a business can anticipate, such as:
- Customer Collections (remember this is not revenue, it is when cash is actually collected)
- Asset Sales
- Fundraising: Debt or Equity
- Tax Rebates or Refunds
The Uses of Cash section lists money going out; it consists of all cash and investments a business will need to operate, such as:
- Salaries and/or Wages
- Inventory Purchases
- Marketing Expenses
- Interest Payments
- Tax Payments
The sum of these two sections, plus your beginning cash balance, total to the ending cash balance for a given period. This ending cash balance, in turn, becomes the beginning cash balance for the following period. For a simplified and illustrative example, see the template below.
Any cash flow forecast is only as good as the inputs and assumptions. Therefore, it is critical that the proper lines of communication are open, dialogue is continuous, and is not prepared by an accountant locked in a back room, but rather, a collaborative effort with input from stakeholders across the organization.
At Fulton Advisory, one of the first things we do with a new start-up or small business client is develop an 8-week rolling cash flow forecast. Ideally, it is reviewed and updated every Monday so, with a current and accurate cash flow forecast, decisions can be made regarding what will be paid or delayed in the given week.
If you would like help forecasting your cash flow or have other financial needs, please e-mail us at [email protected] or fill out the contact form below so we can work together to optimize your cash flow and improve your business.