What is Cash Flow Forecasting? How to Forecast Cash Flow?

cash flow forecasting

Managing the cash flow is a crucial aspect of running a business. Studies showed that over 30% of businesses fail because they just don’t have enough cash to run and go bankrupt. Managing the cash flow effectively will make the business operations much smoother, make better decisions, and be prepared to manage unexpected cash crunches

What is cash flow forecasting?

Cash flow forecasting is the estimation of cash flowing in and out of the business based on past business performance. The business that extends credit to its customers is most likely to have cash flow crunches. In this case, the business owner should plan ahead to optimize the cash flow and avoid the cash crunches to meet the business expenses.

Making a profit doesn’t always mean cash. If you’re selling a service for $5000 along with an invoice that is due in 30 days, the company will have $5000 as revenue but won’t receive actual cash until they get a payment. Your business might look profitable on paper but your cash will be stuck in the receivable if the client is taking too much time to pay you back and it is happening quite often.

With cash flow forecasting, you will only focus on all expenses that you expect to pay and the revenue that you expect to collect during a specific period rather than accounts payables, accrued expenses, and credit.

The main aim of financial forecasting is to manage cash shortages. You can forecast the cash flow months before which will get you more time to get prepared and avoid any shortages. Establishing a line of credit will also help have enough working capital for your business,

How to forecast the cash flow?

Gathering all documents required.

Business owners need to get a better understanding of the financial health of their business. They should be aware of all the statements including, Income statements, Balance sheets, sales tax reports, cash flow, Payroll wage & tax reports, etc.

Deciding the period.

Forecasting cash flow for a new business can be very hard. You won’t be having any previous data for your business. Hence it is not recommended to forecast for a longer period.

For an established business, you can predict your cash flow based on their previous financial data. Having a well-structured sales pipeline and proper bookkeeping makes it easier to forecast accurately. 

List all your income

Make a list of all your income methods during a specific time. You should add the total income for a given period, analyze trends and forecast your cash inflow according to that. You should also record another income method which included Tax refunds, grants, royalties, or licenses. Etc. adding these will show your net income accurately.

List all your expenses

You should analyze all of your expenses within a specific period. This includes rent, payroll, raw materials, assets, bank loans, marketing expenses, etc. Make an estimate of all the expenses that you usually pay.

Draft an estimated cash flow

By analyzing the previous data, you should understand the financial health of your business. By deducting your net expenses from your net income, you will get to know if you’re having a negative or positive cash flow, and you understand different trends and patterns to create an ideal plan that works for your business. You can either make a weekly or monthly plan and draft a detailed plan that focuses just on paying your expenses and collecting your payments on time.

Cash flow forecasting can be quite challenging for business owners that have limited accounting knowledge. It should be updated every month based on the changes in the previous financial reports. If you face trouble forecasting your cash flow, we can help you out. Get in touch with us now!

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