One of the questions we’re often asked by business owners is, “How do I prepare a cash flow forecast?” This is no surprise. It’s an important part of financial planning for any business. Obviously, you need cash in the bank to pay your bills and to pay your employees.  Most critically, you need cash to implement your strategy.  You may be doing well and are considering your next strategic initiative such as expanding into new markets, investing in new products, or recruiting new staff. Having accurate cash flow projections and financial plans will help you understand if and when you can afford to take the plunge.

So, how do you go about producing an accurate cash flow forecast? Here are five tips that will help your organization bring more precision to the process.

  • Establish Lines of Communication

Communication is one of the keys to accurate cash flow forecasting. An effective forecast requires input from a variety of individuals throughout your organization who can provide important figures and valuable insights that will increase understanding of what drives the numbers. The best way to avoid any type of liquidity crisis within your organization is to train top management on the importance of forecasting, as well as the mechanics of the process.

  • Don’t Confuse Cash Flow with Revenue

Revenue provides a measure of effectiveness in sales and marketing, whereas cash flow is more of a liquidity or money management indicator. The critical importance of cash flow lies in the ability for a company to remain functional; it must always have sufficient cash to meet short-term financial obligations.

  • Identify Your Inflows and Outflows

Your cash flow forecast should be a detailed look at your company’s cash position relative to its inflows and outflows. To start, how much money will you be bringing in over the period in question and from what sources? This isn’t a measure of your company’s capacity to produce products or services, but rather what will be collected in payment for goods and services.

  • Create Several Scenarios

When you create multiple scenarios with your company’s future cash flows, you will be able to visualize the impact of certain future conditions, as well as quickly adapt your company’s processes when necessary.

  • Publish the Forecast, Monitor and Adjust Results

No cash flow forecast should be set in stone, since there may be customers who fail to pay, sales that don’t materialize, or unexpected expenses that show up on your doorstep. Once you publish a forecast and share it with management, continue to monitor results in real time as much as possible. Doing this will allow you to identify opportunities to improve your process.

Need help forecasting your cash flow for your business? Contact Bill Fenske at (320) 214-2998.