The Importance of Cashflow Forecasting

The Importance of Cashflow Forecasting

The management of cashflow is an all-too-common stressor on business owners, yet the problem can be mostly resolved with time invested in planning.

We hear from business owners who often find themselves “behind the eight ball,” who feel fortunate each time that a needed (but not necessarily expected) check arrives just in time to ward off multiple issues. If this is how you operate, it is time to make a change to provide you with confidence and comfort.

To plan and manage your business with peace of mind, you actually have to chart out your cashflow. That’s right, you must actively track it (outside of checking your bank balance). 

First Step: Create Your Cashflow

You must start to track your cashflow. Luckily, you have the benefit of historical data to help you map out your cashflow levels in a standard month. Use it! Look at your financial records and bank statements to categorize common expenses. Remember, you are not merely recreating your income statement or profit & loss. Don’t forget to add in cash requirements for any debt payments since those will not show up on income statements.

If cash is typically short on a day-to-day basis, it may be wise to start off tracking cash on a weekly basis instead of a monthly basis. You know when your bills are due, and you know roughly how much they will be based on your historical data.

Once you have historical data in a template, it is ready to be built upon.

Second Step: Turn the History into a Projection

Using your newly created template, it is time to switch your mindset to forward thinking. Begin with recurring expenses like rent; then, add in any one-off expenditures that you foresee in the coming periods, along with any special or one-time receipts that you expect.

Three to four periods of projections allow you to see low points in the future where cash might be tight. The best is to have a rolling 13 weeks of projection into the future. This allows plenty of time to create plans to obtain additional cash through additional income, debt, or equity. Projecting out potential storms helps you to look ahead with confidence, comfort, and peace of mind.

Third Step: Apply Your Projection

Cashflow projections are helpful with daily operations, projects and other one-off expenses.

One of our clients was recently presented a last-minute opportunity to exhibit at a trade show. Based on up-to-date cashflow projections, they were able to determine they could afford attending, including the extra costs of purchasing custom promotional items. They made the decision to attend with confidence and invested in growth without waiting.

Financial decision-making is much easier when you use the tools available to provide accurate information.

You may discover that you like using a more sophisticated tool. Reach out to us if you’d like help with understanding, creating, or finding the right tool for your business