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What is a Cash Flow Forecast and how can it help my business?

Categories: Business Business Planning Business Strategy Small Business

The key to avoiding a cash crisis in your business is to have as much visibility as possible into your Company’s future cash flow.  A cash flow forecast can help your small business plan more effectively.  If you can look into your Company’s operating results in a quicker fashion, you can make changes to your business quickly if you need to.  Before you make a cash flow forecast, make sure that you track your financial results in real-time (as in now).   Most companies receive their financial statement two-to-three weeks after the end of the month or in some cases, much longer.  That is a problem because you are now reviewing history and therefore reacting late.

Don’t wait until the last minute to track your operating performance.  Use an accounting software package and update it at least weekly.  That way, you will know every week whether or not your business is making money.  Next, using spreadsheet software, make a simple cash flow forecast to help you plan your cash needs.  Some business owners prefer a complicated spreadsheet, while others (including me) prefer a simple spreadsheet.  Experience has shown that there is no difference between the two methods in terms of getting to the goal.  Furthermore, if the spreadsheet is too complicated, chances are that it will not be embraced by you or your management team.

For best results, your cash flow forecast should be done weekly.  Make your best guess as to how much cash you will collect during the week and then subtract the anticipated cash expenses during the week.  Then, move to next week, and so on.  My preference is to forecast the cash flow for a one year period, week by week.  That way, you can look forward for one year and your forecast will show you if a cash deficit might occur during any given week.  If your forecast shows an upcoming deficit, then you have plenty of notice, so you can take timely action.  It sure beats being surprised tonight by the sudden news that you don’t have enough cash to make payroll tomorrow morning!  Click here to download a sample cash flow forecast template.

Remember, running a business successfully does not need to be complicated.  Keep it simple!

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