Cash flow forecasting is one of the most important tools for business decision making. Cash forecasting is not only a tool for improving cash flow, but it is also a tool for making better business decisions. The ability to forecast what cash is going to flow into and out of a business on a monthly basis is a powerful business decision making tool.
What is Cash Flow Forecasting?
Cash flow forecasting is the process of managing your cash flow. When you forecast your cash flow, you’ll know when you’ll have enough cash to pay a bill, invest, or make a purchase. An accurate cash flow projection is a powerful tool for decision making: You can see your options and make the best decision.
This process benefits the books by managing liquidity, and it's also good for the emotional state of its stakeholders. Cash flow projections prevent a scarcity mentality by bringing logic into decisions on the timing of business and capital expenditures. It helps decision-makers manage hiring on a more even keel, and its better overall for financial decision-making.
What Happens When Cash Flow is Out of Control?
When your cash flow is gyrating out of control, it keeps you up at night, it leads to stress, feast-or-famine thinking, and it creates conflict amongst company stakeholders. Cash flow problems can impact your business, your relationships, and your emotional state.
Forecasting Reigns in Cash Flow Issues
Forecasting helps businesses reign in common cash flow challenges and confidently plan for the future. For example, you can identify potential cash shortfalls in advance, understand your budget process accurately to create a roadmap for the months ahead, prevent defaults on loans or payroll, and find accounting errors faster – and before they create unnecessary issues or challenges.
How to Get Started
To map out a cash flow forecast plan, you need to gather the following information:
Cash Receipts
Cash receipts from commercial banks, Bill.com, merchant accounts, etc.
Accounts receivable
Realistic projected sales
Cash Disbursements
Recurring expenses such as payroll and bank debits
Accounts payable data
Annual payment information
Any expenses that don't run through accounts payable.
Interest and loan payments
Planned Capex expenditures
Inventory purchases
Using this, calculate cash receipts, including accounts receivable and projected sales. Next, calculate cash disbursements by adding up the recurring expenses, accounts payable, annual payments, loan payments, and planned expenditures. The total amount of cash coming in minus cash going out gives you a picture of your current cash position.
But this is just the beginning.
How to Forecast Cash Flow
To forecast, you will want to project your sales pipeline, cash receipts and cash disbursements by week into the future. We recommend a 13-week cash flow projection. The 13-week cash flow projection can be integrated into the company’s 3-way forecast (typically 12 to 18 months into the future and includes projected profit and loss, balance sheet, and cash sources and uses) and long term financial models (3+ years into the future). Learn more about our 3-way forecasts and long term financial models under our outsourced Financial Planning and Analysis FP&A Services.
Once you have your forecast, you'll also need to set up cash flow/debt key performance indicators (KPIs). These should include information such as cash in the bank, cash conversion cycle (CCC), days sales outstanding (DSO), current ratio and quick ratios.
You'll also need information on:
Working capital
Operating cash flow
A/R turnover
Inventory turnover
A/P turnover
Debt to equity
Debt to total assets
These KPIs are metrics that you can put in place to monitor the strength of your cash position going forward. With a clear plan, clear picture of your current cash flow, and KPIs to track progress moving forward, you can make better business decisions with less stress moving forward.
Need Help with Cash Flow Forecasting?
The Energy CFO specializes in cash flow forecasting. We help you plan for it, decide how best to spend it, and even find new sources of it so that you can invest, grow, and accumulate more. Whether you want to use it to fund company growth, owner retirement, transfer it to the next generation to continue building your legacy, or all three, we'll help you with actionable cash insights for smarter decision making.
Get started today – 4 Easy Steps. Contact us to schedule an initial consultation here. We will have a Zoom listening session and then provide you with a service proposal and an estimate of your investment. Sign our service agreement and then we are ready to begin.