What is a Cash Flow Forecast?

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A cash flow forecast is an estimate of the future inflow and outflow of cash for a business. It helps business owners make informed decisions about how to allocate their resources, and helps them plan for upcoming expenses. Cash flow forecasting can be an important tool to have when you are trying to make decisions involving your business’ funding, capital expenditure, and investments.

Short, Medium, and Long Term Forecasting

There are a few types of cash flow forecasts that you can choose. A typical cash flow forecast will cover a period of between three months and one year. However, you may want to produce different forecasts for different purposes:

  • A short-term forecast, covering the next month or so, can be useful for managing day-to-day cash flow. Short-term forecasts can help you anticipate potential shortfalls and take steps to avoid them.
  • A medium-term forecast, covering the next six months to a year, can be helpful for planning purposes. It can help you identify upcoming expenses and income and make decisions about how best to allocate your resources.
  • A long-term forecast, covering a period of two years or more, is best for strategic planning. This forecast can help you identify trends and make decisions about where to invest your resources.

Related: The Definitive Guide to Small Business Cash Flow

Factors to Consider When Creating a Cash Flow Forecast

There are a number of factors that you will need to take into account when creating a cash flow forecast. These include:

  • Sales: How much revenue do you expect to generate? This will depend on factors such as your sales history, the strength of your customer base, and the seasonality of your business.
  • Expenses: What are your anticipated expenses? This includes both variable expenses (such as cost of goods sold) and fixed expenses (such as rent or salaries).
  • Funding: Do you have any external sources of funding, such as loans or investments? This will need to be taken into account when forecasting your cash flow.

Importance of Cash Flow Forecast

Cash flow forecasting can be a useful tool for all businesses, regardless of size or industry. However, it is especially important for small businesses and startups, which may have limited capital and less financial flexibility. By producing regular cash flow forecasts, small businesses can make sure that they are always aware of their financial situation and can make informed and realistic financial decisions for their business.

Cash flow forecasting is specifically important because it can help you to:

  • Anticipate and plan for upcoming expenses and income
  • Make informed decisions about how to allocate your resources.  For example, if a business owner knows that they will have extra cash on hand in the coming months, they may choose to invest in new equipment or hire additional staff.
  • Avoid potential shortfalls in cash flow
  • Identify trends and make decisions about where to invest your resources.

Another advantage of cash flow forecast is that it can help businesses avoid financial difficulties, by giving them advance warning of periods when they may need to tighten their belts or raise additional funding. It can also help businesses take advantage of opportunities by identifying times when they will have extra cash available that could be used to invest in growth. By identifying upcoming shortfalls in cash flow, business owners can take steps to reduce their expenses or increase their income.

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Cash Flow Statements

There are two main methods of producing a cash flow statement: the indirect method and the direct method.

The indirect method adjusts net income for items that do not affect cash flow, such as depreciation and amortization. This method is typically used by companies that report their financial statements on an accrual basis.

The direct method starts with total revenue and then subtracts all cash expenses, such as operating expenses, taxes, and interest payments. It is more common among companies that report their financial statements on a cash basis.

The most important thing when deciding which method is to choose one that is appropriate for your business and your specific needs. The type of business you have, the level of accuracy you need, and the amount of time you have available to dedicate towards forecasting, will all play a role in deciding which method is best for you.

Once you have selected a method, the next step is to gather data on your past cash flows. This information can be used to create an estimate of future cash flows. You will need to consider factors such as historical sales patterns, seasonality, planned changes to your business, and any other relevant factors.

The Easiest Way to Forecast Cash Flow

One way to forecast your cash is to comb through expense spreadsheets, loan documents, and accounting tools for the data you need. Then use that historical data to project the period of time in question.

It is manual, cumbersome, and probably not practical—especially for small business owners who have competing priorities.

The easier and more effective way to forecast cash is with technology. Using an all-in-one financial management tool can provide real-time snapshots and projections whenever you need them. Today’s small business owner can access technology that connects directly with the banking and accounting tools they already use to consolidate their business finances.

While everyone recognizes the importance of cash flow projection, most small business owners simply don’t have time for spreadsheets and formulas. That’s why it’s critical to use available technology to take this work off your plate.

The bottom line is that cash flow forecasting is a vital tool for all businesses. By using a cash flow forecast, you can avoid financial difficulties and take advantage of opportunities as they arise. With the right solution in place, cash flow forecasting can be quick and easy, giving you more time to focus on running your business.

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