A significant part of cash flow management involves forecasting. Cash flow forecasting is vital for your business performance, as it estimates the cash coming in and out of your business over a specific time frame.
One vital thing to note is that the process of making this cash flow forecast is very straightforward and involves simple steps. Below you will find a compilation of these steps.
1. Gather Data on Historical Cash Flow
Gathering data on your historical cash flow should be the first thing you do when creating a cash flow forecast. Make sure to collect all information on your income or cash inflow for every day, week, and month. Also, list the sources of these cash inflows.
Apart from your past income, collect data on your expenditures or cash outflows. Expenditures involve cash that goes out of your business, like tax bills, salaries, and rent. Once you have all the data on your income and expenses, you can make your predictions. Note that using past figures to create future cash flow forecasts is significant in financial planning.
2. Identify Key Variables that Affect Cash Flow
As you can see from the above point, income, and expenses are some of the primary variables that impact cash flow, as they represent cash that comes in and out of your business. One essential thing to remember is that these variables are incredibly vital in cash flow management.
Apart from income and expenditure, your business’s sales are crucial variables impacting cash flow. Your monthly business sales affect how much you will earn. Thus, when creating a cash flow forecast, include your business’s current sales trends, including the VAT.
3. Develop Scenarios for Different Situations
One vital thing to note is that financial forecast scenarios can help you predict the outcome of a business decision before you make it. Thus, developing scenarios enables you to test how different financial decisions can impact your cash balance.
Developing various scenarios plays a crucial role in generating a cash flow forecast. Fortunately, there are numerous cash flow management tools at your disposal to help you experiment with different situations. You can create scenarios such as:
- Assessing the influence of new hires on expenses and income.
- Evaluating the Influence of acquiring fresh clientele on your income
- Assessing the outcome of recent investments in sales, revenue, and expenses.
Forecast scenarios offer the opportunity to delve into different business adaptations, ranging from simplistic to complex ones. By crafting these scenarios for diverse circumstances, you’ll be better equipped to anticipate the effects of each choice.
4. Calculate Cash Flow Projections
After gathering data on your income and expenses and developing different scenarios, you will need to calculate your cash flow. Your present cash flow calculation will help you create future cash flow projections.
When calculating, you can categorize the income and expenses in weekly or monthly total amounts. This categorization will depend on how you operate your specific business. Once done, take the income and subtract your business expenditure from it.
You will get a positive or a negative figure from the income minus expense calculation. If you get a negative amount, your business has more money going out than coming in. However, if you get a positive figure, it means that your business has more money coming in.
Once you have your total monthly or weekly cash flow statements, you can use the calculations to get your cash flow forecasts. Several positive cash flow months signify that you have enough cash to invest or grow and be able to manage your business expenditure. On the other hand, several negative cash flow weeks convey that your business is in trouble, and you may need to plan how to meet your business expenditures.
5. Analyze and Adjust Your Forecast Regularly
Once you have created your cash flow projections, evaluate your actual cash flow against the predicted cash flow. This step is very crucial. Comparing your estimated and actual cash flow will help you determine why your cash flow failed to meet your expectations. In addition, a cash flow forecast analysis will enable you to note areas of your business that need changes.
Another critical thing that you must do is to adjust your forecast regularly. One thing that you should keep in mind is that the business environment is constantly changing. There may be changes in the economy’s interest rates, customer base, or even unemployment rates. Therefore, make sure to adjust your forecast regularly.
Cash flow projections help you predict the financial health of your business. The monthly or weekly cash inflows and outflows enable you to understand where your business is going and how to plan for the future. Have you ever created a cash flow forecast? If yes, how did the forecast impact your business decisions?