As a business owner you’ve got a lot to worry about. Projects need to be completed on time and within budget.
Client expectations. Competitors. You don’t need more confusion in your life. You need simple and effective tools that work. That’s why I am excited to share a simple cash flow tool you can use to hack your business.
Here is one tool that I consider to be a game changer for your business: A Cash Flow Forecast.
If you know how your business takes in and uses cash you can be proactive about managing it.
Plus, the process of creating the cash flow forecast is one of the most effective ways to understand how your business works. It’s a practical tool which deepens the understanding of your business the more you use it.
Surprisingly, a business can run out of cash for a number of reasons: Payroll, collections, and even growing too fast.
Getting a jump on these problems can mean the difference between success and failure.
The best part…
You don’t need to understand complex accounting or finance to build this report. Simple addition and subtraction, plus an understanding of your business (something you already have).
Convinced you need to build out a Cash flow Forecast? Great, let’s start the process…
What Makes Up A Cash Flow Forecast?
The cash flow forecast is a simple concept: How much cash will your business have in the upcoming week? Month? Next couple of months?
It’s simply a spreadsheet broken down by category, detailing the cash coming into and out of your business.
Generally, you’ll project your cash flow out 8 to 13 weeks. An 8 week forecast is a great place to start.
There are 4 parts of the cash flow forecast: Beginning Cash Balance, Cash Flows into the business, Cash Flows out of the business and your available cash balance.
Each of these can be made up of actual and projected numbers.
This brings up an important point: The cash flow forecast will never be entirely 100% accurate. After all, forecasting means there are uncertainties out of your control. For example, the check promised next week may or not come when we expect it.
Keep this in mind as you build it out and don’t let it keep you from trying to constantly make it more accurate.
Let’s begin with the first part: the beginning cash balance…
Beginning Cash Balance
This is your starting point. The rest of your forecast will build off of this number.
If you look at the sample cash flow forecast you’ll see the beginning cash balance at the top left. (It’s the selected cell with the blue box around it…$55,000).
Where does this number come from?
This number comes from your accounting system at a point in time. It is your cash on hand, including all of your outstanding checks and charges that have hit the bank.
If you want to make it easy, just begin your cash forecast at the beginning of a month and you can use your accounting system balance with confidence if you are reconciling your books on a monthly basis.
In this example, just take your Quickbooks balance as of 12/31 to use as your starting balance.
This will be the only time your cash position in 100% accurate. I’ll get into this a little later on why this is the case.
Once you’ve got your the beginning cash balance you can move onto the next section: Cash Inflows into your business…
Cash inflows are simply the different ways cash comes into your business. The good news is the list is pretty common across all industries so it’s straightforward.
To determine which cash flows into your business, here is a list of common cash inflows…
Sources of Cash
- Projected Sales- Sales which are projected to produce cash as a result of the sale. For example, if you’ve just signed on a client and they give you a retainer to start. This number is forecasted. You need to have an understanding of your sales pipeline to get this number (this is beyond the scope of this post).
- Accounts Receivable- Invoices you’ve already sent out and are waiting to collect on. Your accounting system should tell you which ones are coming due this week.
- Loans/Lines of Credit- Bank lines of credit and any loans coming in.
- Equity Contributions- Money you or someone else puts into the business as investment.
- Other- Misc items that do not fall into the above categories.
Here’s a look at the first half section of the cash forecast…
As you can see, each section is broken out in some detail. The Projected Sales and Uncollected Invoice sections have the larger customers broken out and an Other line to consolidate the smaller balances together. This keeps the cash flow forecast streamlined.
If it doesn’t fit into the above categories you can put in Other. For example, grant money could go here.
Once you’ve got your cash in section filled out, take a moment and look at the results. You should see the total cash coming in for the week under the Total Cash In column.
This is the projected cash you expect to come in over the following weeks. Will this amount be 100% accurate? No, because of the uncertainty of sales and collected invoices talked about previously. But, take a moment to see what’s happening. Notice when you may have a lot of cash coming in and not so much. Keep this thought in mind as we move onto the next section.
Once you’ve got this portion filled out, it’s time to move onto the next: Cash Outflows…
The cash outflows (or cash disbursements) are simply the items which will have a cash outflow effect on your business. These are usually more predictable than your inflows.
Here are some typical cash outflows…
Uses of Cash
- Payroll and payroll taxes- This is usually the largest expense in your business. If you’ve got salary employees this can be very predictable. How are they paid? Bi-Weekly, Semi-monthly? Simply fill out the spreadsheet with the payroll dates in mind. If they are hourly you can estimate based on history.
- Rent- Usually another big expense. This one generally occurs at the same time every month.
- Insurance- Renewed each year, this expense is known ahead of time and predictable.
- Taxes- These include any large taxes owed to city, state, or federal. You can add categories under this if you have specific ones that are large, for example sales tax.
- Capital Purchases- large purchase items for your business typical for investment in the future of your business. Items like furniture and fixtures, equipment, and software are examples.
- Other Expenses- The rest of the smaller expenses can be lumped together in this category.
Here’s what these look like in the bottom portion of the Cash Flow Forecast…
Once you’ve got the cash outflow portion filled out, you have built out the tool. You can now begin to start using it.
A couple of things to note:
The Net Change in Cash line is simply the difference between the cash inflows and outflows for the week.
The Ending Cash Balance is the projected cash on hand at the end of each week.
It’s Time To Start Using This To Predict Cash Flow
The main purpose of this tool is to get a handle on your cash in the near term. Each business is unique in the way it generates cash and uses it. This tool helps you to get better at predicting and managing this process.
To put it in simple terms: Your business has cash inflows and outflows going on almost daily. This is what goes in and out of your bank account. There are many categories related to your business that can fall into one of these two categories.
Your job is simply to categorize each one based on what your business has done historically. Once you’ve done this you can start referring to this tool each week to get an idea of what your cash will be like at the end (and if you need to make any adjustments).
Review Your Cash Weekly
Here’s where the tool becomes extremely useful. At the end of each week, sit down and compare what happened to what you thought was going to happen.
For example, Were there invoices you thought were coming in that didn’t? Sales expected to close that fell through? Or did you end up crushing it and getting more than you thought?
Run through each category and really try and understand the causes behind what happened. Once you’ve done this…
Make Adjustments and Repeat Weekly
You’ve filled out your forecast and started to review weekly. Great! Now you can begin to tweak your forecast.
Are there any updates you need to make? Things can change pretty quickly from day to day so remember to keep this spreadsheet open and adjust as needed. For example, did someone decide to leave? You’ll need to cut them a last check and adjust the payroll going forward.
Remember this is a fluid tool. It’s not like the Balance Sheet or Profit and Loss Statement. It’s future oriented and adjustable. This is its power as a tool.
Do you see a negative ending cash balance two weeks from now? This is a strong warning you need to find cash before then or adjust your outflows. Where can you cut expenses? Hold off on large purchases?
It’s a constantly evolving and dynamic model…
Building out a cash forecast for your business is an excellent way to understand how it gets and uses cash.
Using this information you can make decisions on a short and long term basis which will affect your cash position. Cash is the fuel that drives your business and gaining a greater understanding of it is one of the best ways to gain control of what’s going on.