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Create a Cash Flow Forecast to Fend Off Surprises

By | 05.20.20

Create a Cash Flow Forecast to Fend Off Surprises

Contributed by Small Business Expert Gene Marks

The business owners I know who have been in business for a long time all, without exception, hate one thing in particular: surprises. Running a business is hard enough. The unknown things that come about make the job even harder.

Everyone knows you can’t eliminate surprises from your business – or your life. But smart entrepreneurs understand that with a little foresight, most of the “surprises” that impact your business don’t have to be surprises at all. In fact, you can anticipate them.

How? By doing a cash flow forecast.

A forecast is not a budget. When you do a budget, you’ve established set financial parameters for a period or project, and then you track your actual activities against what you thought those activities would be at the beginning of the period. But the budget doesn’t change. It’s used to determine spending levels, parameters and barometers for both the owners and managers of an organization. You’re either on budget, over budget or under budget. That’s it.

But a forecast is dynamic. It’s allowed to change. A forecast takes the latest, real-time factual information, and then builds a future based on that information to help the manager look ahead and anticipate what’s coming down the road. Every manager who has a handle on cash knows that a core function of managing cash is to have a solid forecast of when cash is coming in and when it’s going out. In other words, no surprises.

So can you do this, too? Of course you can. You can also build a killer cash forecast for your business. Here’s how.

Start with a Spreadsheet of Expenses

First, create a spreadsheet where you list your income statement accounts just like your general ledger accounts, and if you don’t know what I’m talking about then immediately stop and get your accountant involved in this exercise.

Next, type or input into each column next to the accounts the monthly income statement amounts for each month so far this year. This will take some work the first time but then each month after you only have to update for that month’s activity. At the end, have a column summing up the year-to-date amounts.

Next, have three more columns for the next three months. Just three months. I’m not asking you to forecast any further than 90 days into the future because even the smartest managers I meet aren’t telepathic.

Now, fill in the blanks for the next three months using your monthly expense history and some future-gazing.

Many of your expenses are easy to fill in – you pretty much know what your rent, salaries, healthcare, utilities, internet, office supplies and other operating costs will be over the next 90 days – they’ll probably be similar to the past.

Now It’s Time to Look at Sales and Margins

Your cost of sales and gross profit on sales should be pretty easy, too. I’m not asking for you to be exact. But looking at the past, can you come up with a reasonable gross profit number on sales? Is it 30 percent? 40 percent?

You should know – to a reasonable extent – what you’re making on an item or service once you bill it. This is probably the most important number on your cash flow forecast so take care and adjust it each month as you see fit.

Now the hard part: sales. It’s tough to forecast revenue. But you do have some data to help. You’ve got this year’s history. You’ve got similar sales from the same month last year or hopefully the year before that. You’ve got your backlog and open orders. You’ve got your pipeline report of potential sales. You do have all this data, right? If not, that’s a separate issue.

Go talk to your sales team and get their thoughts as to what’s coming up the next 90 days. But take what they say with a grain of salt. Salespeople love to exaggerate! I accept that you’re not clairvoyant. But, with the data you have and some thought, I’m confident you should be able to come up with a decent forecast of sales over the next three months.

You’re Almost Done!

After you’ve put together your forecasted cash-based income statement, take a step back and consider any other significant cash payments (or receipts) that may be happening over the next three months. Tax payments. Debt payments. An advanced payment for insurance or materials. A refund due. A big customer check coming. Drop those amounts in on the bottom of your spreadsheet.

And there you have it: your cash flow forecast. Now you know what’s going to happen in the next 90 days. Are there any problems coming up? Do you need to talk to your banker? Or better yet … your financial planner? With a killer cash flow forecast you’ll be looking ahead. You’ll be more proactive. You will make decisions about the future, not as a reaction to current events.

Don’t worry. You’ll get better at this each time you do it and it’ll be faster each time, too. But once you get in a routine you’re going to look forward to this exercise. Why? Because suddenly, you’re going to know exactly what is going to happen to your cash in the near future, and you’ll have the power to potentially do something about it. There’s nothing more important for managing your cash flow than that.

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