How to Create a Cash Forecast Fast and Why it Matters

Aug 20, 2017 | Anne's Blog

How to Create a Cash Forecast Fast and Why it Matters

Cash is king in a business. Actually, cash is the entire royal family in a business. Profitable businesses can go out of business if they have no cash nor access to cash. Unprofitable businesses can shut their doors (real or virtual) even faster if they have no cash.

You get the picture. And you may be saying to yourself, ‘well then why the double hockey sticks do I need to care about an income statement and whatever in tarnation that balance sheet thing tracks?’ Good questions that we’ll cover another time. For now just accept that as a business owner wanting the healthiest most profitable business possible — you do.

Back to cash. Given the importance of it, what’s an easy way to forcast — make an educated guestimate — where it’s coming from and how it will be used in the near future? It’s a look into the future and ‘easy’ may not be the best word so how about ‘effective’ instead. The truth is, forecasting cash flows isn’t hard and it isn’t easy. It’s one of those remarkably important tasks for a business that all too often doesn’t get done at all. We’re going to look at a couple ways to approach it.

First, the back of the envelope method. Grab an envelope, or a napkin if it’s more readily available. Across the top of the paper (please don’t use a cloth napkin), write down the time period you’ll be using. (See illustration below.) Keep in mind, the purpose of this is to end up with a sense of both how much cash is moving and when it is anticipated to move. Per month would be the longest period to use for usefulness. Per week or per day can become critical in a cash crisis situation or if the business is so cash flush it should be invested daily to generate more income (think larger corporations and a distinct cash management function).

Put the cash balance (from accounting program, not online bank balance) at the top. Now take a stab at what you believe will be received in the next month.Received is the key word. Cash over the transom. Not sales that won’t be paid for by customers until a later month. Any other cash you know of that’s expected in this month? Perhaps from the sale of a hard asset? Insurance claim? Anything? Add it all up and put the number in the Incoming row.

Next, do the same for the Outgoing row. What cash is going out the door during the period? Regular bills that get paid every month, payroll, etc. Include bills that will get paid during this month that don’t happen regularly – insurance premiums and advertising expenses, for instance. The total goes in the Outgoing row.

Now for the math – addition and subtraction. To the Starting Balance, ADD Incoming and SUBTRACT Outgoing. The result is Ending Balance. Copy that number to the Starting Balance of the next month and repeat. And so forth.

That’s the starting point. Next is to update what really happened to improve your forecasting abilities and therefore the accuracy of the forecast.

Why do this exercise? It provides a bucket load of information about what’s going right and less right with your business. It shows when in the future there may be more cash flowing out than in – the sooner you recognize that will happen, the sooner it can be dealt with in any number of ways. Maybe a concerted collections effort to bring in more of your cash sooner. Perhaps moving an online launch earlier to trigger cash in earlier. For those with businesses that have a seasonal cash flow to them, cash forecasting is a must.

The second method of cash forecasting increases the detail level which supplies yet another layer of useful information. A spreadsheet works better than an envelope or napkin for this. That said, the overall process is the same, the granularity is finer. What is the starting balance, what’s coming in, what’s going out and what is the result of those two buckets of cash movement on the starting balance number. Record and learn from your results, rinse and repeat. Check out the spreadsheet example below.

Now to address the classic complaint about the whole idea of guest-i-mating the future…..”but Anne, I have no idea how many sales I’ll have next week or month or quarter!” With respect, that’s baloney. Sure, it will likely take some ‘sit down, review the available data and think time’, but it’s certainly not impossible to make an educated estimate.

What have sales been historically? Are your plans for the current year in line with what’s gone before? New products/services being launched? If so, what are you targeting for sales? What are the associated expenses and when will they have to be paid?

If all this does is make your head spin, know that you can reach out at any time to have a private conversation about what your best next move is in this area. Cash forecasting can make a world of difference in your business and your stress level, too. It’s a twofer.