Forecast Cash Flow. Update Your Forecast Frequently.

Here is the next installment of this blog series that presents some ways that a business owner can improve the cash flow of the business.

A business owner once asked me why I felt it was important to forecast cash flow.  I responded by reminding him that he had previously told me that he was often worried as to whether he would have enough cash each month to pay the bills.  So, why is cash flow forecasting so important?  Simply put, if the business runs out of cash, it would become insolvent and possibly go bankrupt.

It is no excuse for management to claim they didn’t see it coming. Cash coming into the business is tied to revenues coming into the business. Generally, there is a time lag that occurs between the two and this time lag varies from industry to industry.  To be clear, cash flow can be forecasted and it should be forecasted because cash flow is the life-blood of all businesses.  To ignore this fact can be a fatal mistake. As a result, it is essential that business owners forecast cash flow and make plans to make sure the business has enough cash to survive.

Large corporations utilize a variety of methods to forecast cash flow.  Forecasts are often prepared going out 5 years, 10 years, and even longer.  For business owners of small and medium companies, cash flow forecasting can be simpler.

The easiest method for small and medium companies to forecast cash flow is to have a spreadsheet that shows cash coming in from all sources for a given period and that shows all the cash going out for the same period.  At a minimum, this should be done looking ahead for the next 90 days.  If possible, this should be done looking ahead for the next 12 months.  The cash flow forecast should be updated at least every month making adjustments as changes to potential sales and potential expenses become known.

To build the best cash flow forecast model possible you should use a seasoned professional, like a B2B CFO.  The B2B CFO can build your model, put it into place, and then you can have someone on your accounting staff make updates to the figures.

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