Managing cash flow – the money flowing in and out of your business – is essential for success. It can mean the difference between a business that thrives and one that crashes and burns.
A cash flow forecast is a breakdown of expected receivables and payables. It also helps businesses build contingency plans and prepare for unforeseen circumstances that might impact cash flow.
Estimate Your Sales
Whether you want to examine the impact of a specific factor on sales, predict short-term trends, or simply get a picture of when your cash will be coming in and going out, you’ll need to start by estimating your business’s future performance. There are many different forecasting methods available, and some might be more appropriate than others depending on the objectives you have in mind and the data you have at your disposal. For example, if you don’t have much historical data to work with, qualitative customer data may be more helpful than quantitative data like price indexes. 
Typically, the starting point for a forecast is your opening balance for the current period — that is, the closing balance of the previous period. Then you build your picture of what key cash inflows will be, using data from the past or estimates based on the current situation. For sales receipts, you might break the numbers down by customer or product category if you’re able, or just keep a headline number that includes all sales.
You should also take into account any seasonality in your sales, if there is any. For example, if sales dip in the summer, you might assume that this pattern will continue. You might also want to estimate your days sales outstanding (DSO) if you offer credit or payment terms to customers. This will help you calculate how long it takes on average for you to receive payment from each sale, and can be a useful benchmark to track against.
Once you have your estimated sales, add them to the “money in” section of your mini cash flow forecast (see Sheet C in our cashflow template). Include any VAT that will be payable as well if you are registered for it.
At this stage, it’s also a good idea to think in units rather than just in dollars – for example, the number of products sold or hours worked. It will be easier to compare your forecasts against actual data this way, and see where your assumptions were right or wrong. Or, you can hire an expert from Bottom Line Bookkeeping LLC. Remember that your cash flow projections will need to be updated throughout the month, as actual cash flows come in and out of your bank accounts.
Estimate Your Expenses
When you make projections for your business, it’s important to use actual data rather than estimated numbers. The key cash inflows and outflows are your accounts receivable (cash your customers owe you) and your accounts payable (cash you need to pay during a period for expenses, such as employee salaries).
Your accounting software should provide you with these figures for the past period, but if you don’t have access to it, you can find them online. You can also ask for this information directly from your vendors and suppliers. It’s not always possible to get exact data, especially for one-time expenses, but you should do what you can to get the most accurate estimates as possible.
For your cash inflows, you’ll want to include your sales forecasts. You can find these on your profit and loss statements, but they don’t fully represent your actual cash inflows since some of your customers will pay you on credit terms. For your cash outflows, you’ll need to account for a variety of factors. These may include the timing of your recurring expenses, such as rent and utilities, as well as any capital expenditures you’re planning.
When estimating your cash outflows, it’s also important to consider your payment terms with your suppliers and vendors. Some of them might have a set payment due date while others might have a variable payment period, such as 30 days. You’ll also need to take into account any tax payments you’re expected to make, and the timing of those.
Once you’ve accounted for your cash inflows and outflows, you can calculate your net cash flow for the period by subtracting your expenses from your revenue. This is an important number, because it shows you whether your company has enough cash in reserve to cover your upcoming expenses. You should always create contingency plans to mitigate the impact of unexpected events on your cash flow, such as economic downturns or late payments from customers. And you should regularly update and refine your cash flow forecast on a rolling basis, based on your actual performance and changing circumstances.
Estimate Your Receivables
A cash flow forecast is a way to predict how much money your business will need in a given period. It includes all the cash inflows (money coming into your bank account) and the cash outflows (money spent on business operations). Putting together an accurate projection can help you determine if your current cash flows are sufficient to fund your business expenses, or if you need to increase revenue or find alternative ways to raise cash.
The first step in a cash flow forecast is to estimate your sales. This can be done by looking at your past sales numbers from your financial statements or using your forecasting spreadsheet to work out your expected sales for the next period. It’s important to consider seasonality and other factors such as changes in market conditions, competitors’ actions, or any other factors that could influence your sales in the future.
Once you’ve estimated your sales, it’s time to estimate your costs. This can be a little tricky because some of your business’s costs are ongoing and you may not be able to make exact predictions. However, you can try to work out your estimates by using a history of your costs or forecasting spreadsheets from previous periods and then adding in a margin or discount that is appropriate for your business.
You can then add in any other one-off expenses that you might have such as a loan repayment or the purchase of new equipment. You can also use an expense tracking tool that allows you to automate, track, and reconcile all your business expenses in one place.
The final part of a cash flow forecast is to subtract your outflows from your inflows and calculate your net cash flow for each day, week or month. Doing this can highlight days, weeks or months when your business is expected to generate more cash than it will spend and can help you plan accordingly. It can also be helpful to keep a running total of your weekly or monthly cash flow so that you can spot trends over time.
Estimate Your Payables
Having a good handle on your cash flow forecast can help you manage your business’s short-term debt and expenses and avoid costly surprises. It can also help you predict how much money will come in and go out over a period of time, which is essential to make sound decisions for the future of your business.
It’s easy to understand why so many small businesses experience cash flow problems, with a recent survey finding that more than 89% of those experiencing these issues found it difficult to grow or take on new projects. By putting in the effort to create and update your cash flow forecast on a regular basis, you can prevent these problems from occurring and keep your business on track to thrive in the long run.
Start by listing all the cash inflows you expect to see over a set period of time, such as a month. These will include sales, pending bank payments and receipts and other income such as interest from investments. Add them all up to get your total cash inflows for that period. Then, list all the cash outflows you are expected to have to pay during that period, such as expenses and other bills. Take away your net inflows from your net outflows to find your net cash flow for that period.
If you are unsure how to estimate your payables, look at your previous invoice data from the past year and try to identify any trends. For example, you may be paying suppliers for the same amount of goods over and over again, which you can predict by looking at the cost history in your invoices. You should also consider the timing of your payments, such as how long it usually takes for your customers to pay you.
You can do this by calculating your days sales outstanding (DSO), which tells you how long, on average, it takes for you to receive payment from your customers after they’ve received your products or services. Finally, don’t forget to include VAT in your sales if you are registered for it.
