Four Simple Steps For Preparing Your Cash Flow Forecast

Running a successful business requires an accurate cash flow forecast. While many entrepreneurs don't have a background in accounting or finance, learning to create a cash flow forecast is not as difficult as it may seem. Once mastered, it will become one of the most valuable tools for managing your business.

Why is it important to make a cash flow plan?
Simply put, without sufficient cash, you can’t pay your bills. A cash flow forecast provides a clear view of your financial situation. It helps you anticipate if and when you might run out of money, allowing you to plan ahead. The forecast can highlight areas where you may need to cut costs, invest, or increase sales efforts. Conversely, if your business is thriving, you can use the forecast to consider growth opportunities, such as expanding into new markets, upgrading equipment, or hiring more staff. Accurate cash flow projections ensure that your plans are realistic and achievable.

Four steps to creating a strong cash flow forecast

1. Decide on your planning timelines
Cash flow planning can cover a few weeks to several months. Plan as accurately as possible based on available data. If your business has been operating for a while, use historical sales data to inform your forecast. For new businesses, projections might be less accurate due to a lack of historical data, but don’t worry—cash flow changes over time, and forecasts can be adjusted as you gather more information.

2. Itemise your income
List all sources of income for each week or month in your forecast. Create a column for each week or month and a row for each income type. Include sales revenue and any other sources, such as tax refunds, grants, shareholder contributions, or royalties. Ensure you're tracking when the money is actually deposited into your account. Sum up the totals to find your net income for each period.

3. Write down everything you spend
Next, record all expenses for each week or month, including rent, salaries, raw materials, assets, loan repayments, taxes, marketing, and bank fees. After entering all this information, add up the totals to determine your net spending.

4. Figure out your cash flow
For each week or month, subtract your net spending from your net income. This will reveal whether you have a positive cash flow (more money coming in than going out) or a negative cash flow (more money going out than coming in). Continuously update this forecast to get an accurate view of your financial health. Several bad weeks may signal a need for corrective action, while a string of good months might indicate an opportunity to expand or invest in growth.

The bottom line
Though creating a cash flow forecast may feel unfamiliar at first, it’s a simple and essential business management skill. By following these steps and monitoring your forecast regularly, you'll gain critical insights into your business’s financial health. If you need additional funds to grow your business quickly, contact Merchant Capital today.