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Cash Flow Forecasting

January 21, 2019

Timing is critical in business, and unforeseen shortfalls in your cash position can be detrimental to operations and morale. Cash flow forecasting, driven by historical accounting data and your own understanding of the rhythm of your business, could be the key to helping you see around corners months in advance. 

Tools of the Forecaster’s Trade

Cash flow forecasting involves a multitude of data derived from sales, payroll, receivables, inventory, and payables. Given the myriad variables and components, the process can overwhelm even those who are familiar with the process. Fortunately, there are resources to help you tackle the job:

> Online Templates. Web-based templates, though somewhat limited, are widely available and will guide you through the manual process of entering your data in the simplest of terms.
Examples: score.org, SBA.gov, Google Docs

> Software Add-ons. Cash flow modules available with your accounting software package are more automated, allowing you seamlessly apply historical financial data to sales, receivables, and payables.
Examples: QuickBooks, Xero, FreeAgent

> Customizable Systems These personalized programs will import your unique financial data from the company’s existing accounting system to generate robust forecasts and will permit you to toggle parameters to explore different what-if scenarios. Some forecasts are sharable online, allowing multiple users to collaborate in real-time.
Examples: Float, Dryrun, Pulse

Maximize Your Forecasting Accuracy

Enhance the reliability of your cash flow projections by following these simple guidelines:

> Timing. Apply two years of historical data to your forecasts and project only 12 months in the future. 

> Variables. Look beyond fixed costs to include fluctuating expenses (i.e., quarterly taxes, insurance premiums, seasonal inventories and sales variations, months with three payrolls). 

> Assumptions.Make educated assumptions based on knowledge of your business. For example, use an average number of days your customers pay invoices to determine influx of cash and remember that cash flow depends on paid sales, not just contracted sales. 

> Comparisons. Maintain an iterative, rolling 12-month projection to continuously identify variances in data. Learn from your mistakes and calibrate assumptions for future projections.