• March 20, 2020 at 4:30 pm #96958
    Natalie Paris
    Participant

    Ok, this is going to be a long post but it’s an extremely important one for business owners of all sizes. Today, we are going to talk about cash flow forecasting. The main reason I chose this topic today is because of the current situation that has business owners across the world wondering if they will be able to weather this storm. I want to provide you with some insight and tools into one way that you can look at your businesses finances and leverage them for survival during this potential economic downturn.

    At the end of the month a business might be showing a solid profit but still not have any money. This can be caused by negative cash flow within the business. Cash is king and the lifeblood of every business on the planet. A business owner that focuses too much on profit and not cash flow can be doomed for failure. Let’s make sure that you’re not that business owner.

    A cash flow forecast is critical when running a business. It gets you thinking about the upcoming months, what kind of money might be coming into the business and what kind of money will be leaving the business. It can also get the wheels turning about the direction you want to steer the business towards. Are there potential shortfalls that could hinder business growth? Will the business have enough cash to pay the bills during seasonal dips or economic downturns? By creating a cash flow forecast, you can strongly position yourself to be prepared for the high and the low periods or months that are bound to happen at some point.

    So now that we’ve talked a little bit about what forecasting cash flow is and why it’s important, let’s cover how to do it. The easiest way to create a cash flow forecast is to look at the cash flow from that last 12 months and create predictions on what you think the cash flow might look like for the next 12 months. From your accounting software, pull a Statement of Cash Flows report, a Profit and Loss Report and a Balance Sheet, by month for the last year. This will let you know  what the cash flow has been like for the last year. With this information, you can take the cash flow forecast template and enter in all the information by month for the next 12 months. The idea here isn’t to just copy and paste the numbers but to create a plan for the upcoming year. Think about the direction you want the business to go, what the possible income stream will look like and what the potential expenses are going to be.

    Ask very specific questions about the business to help you create a good forecast. Are you trying to grow your business? Are you trying to sell the business? Are you expecting a downturn in the economy that might affect the level of income for the business? Are there slow months that might require extra cash savings from the busier months? These are all factors that need to be considered when creating the cash flow forecast for the next 12 months.

    Ok, so now that you’ve created a picture of what the cash flow will most likely look like for the next year, it’s time to analyze the data and create a plan for any red flags (or yellow flags) that might be showing up in the forecast. This is where you can obtain ideas on how to boost or preserve your cash flow throughout the year. During the busy or profitable times it is important to boost cash reserves and during difficult or slow times in the year it is crucial to preserve cash flow. Review how long customers take to pay their invoices. If customers are taking an exceptionally long time to pay invoices, that can significantly hold up cash flow. Offer discounts on early payment of invoices or penalize late payers. Reducing expenses that aren’t critical for running the business can be cut to help either increase or preserve cash flow. These are just a couple examples on how to increase cash reserves or preserve the flow of cash.

    It’s important to look over and update this report every month because as the year goes on, certain things might change and tweaks might need to be made to the forecast. I know this might sound like a lot of work and at first, it does take some time but just like any good habit, it becomes easier to create and understand. Like I always say, the biggest difference between thriving and struggling businesses is how the owners understand and manage the finances. Don’t forget to download the template and get your cash flow forecast started.

    Natalie Paris
    Three Rivers Bookkeeping
    Tel: 907-331-0208
    Email: [email protected]

    Attachments:
    1. 2.2.3.-Cash-Flow-Forecast-Template-1.xlsx
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