Tips for creating accurate cash flow forecasts
Leverage these four tips to help accurately project your business cash flow.
Projecting your business cash flow
Cash flow forecasting lets you predict how much money you'll have month to month for the next year. By creating forecasts, you can anticipate cash shortages and take advantage of times when you have extra cash.
"Cash flow projections let you keep track of the inflow of cash and the outflow of cash," says Jerry L. Mills, founder and chief executive of B2B CFO, a consultancy firm that helps small businesses with cash management. If you're starting a new business, forecasts will be based on educated estimates. If your business is established, you can use your records from previous years to guide your projections.
Score.org provides a template for a cash flow forecast or statement:
Cash receipts (inflows) – Cash paid out (outflows) = Cash position (at the end of a month)
Read on for tips to create more accurate cash flow projections.
1. Use your sales forecasts to project cash flow.
Start by looking at your sales projections and identifying the months in which you expect seasonal fluctuations. Some businesses have busy and slow seasons, and you'll need to know yours.
If you don't have historical sales data, project your sales based on competitive research.
In either case, Mills suggests avoiding the temptation to overestimate your sales. Being realistic about your revenues at the outset will help you prevent cash problems later.
2. Record revenues upon payment.
Retail businesses are paid immediately at the point of sale. If you invoice your clients, however, it can take 30 days or more to get paid. That delay can complicate your cash flow forecasts, especially if the sale and the actual payment occur in different months.
To keep your projections accurate, reflect cash for revenues in the month it is received, not when the related goods are sold. Doing otherwise creates the false impression that you will have more cash than you actually do.
3. Remember recurring variable expenses.
Fixed costs such as rent and utilities are easy to remember and include in your cash flow projections. Variable expenses, however, are often overlooked:
Quarterly taxes. "In April, for instance, businesses may have to draw from the owner to pay estimated taxes," says Mills. Quarterly estimated taxes are due April 15, June 15, September 15, and January 15.
Months with three pay periods. Most months, you'll pay your employees twice if you're on a biweekly cycle, but some months will occasionally require three pay periods. Be prepared to sign extra checks by identifying months with a third pay period and taking note of them for your forecasts.
Seasonal inventory. If your business experiences a busy holiday season, you'll probably buy inventory in September or October, even though you won't earn revenue on it until later. "You're going to have to pay for it before you sell it in December, and that needs to be in your cash flow projection," Mills says.
4. Prepare for unexpected expenses.
All businesses run into unexpected expenses. For example, your delivery vehicle might need a new transmission, or your insurance premiums might suddenly increase.
While you can't precisely forecast unexpected expenses, you can prepare for them. Mills recommends setting aside about 10% of your monthly revenue to make sure you have cash in case of emergencies.
"The worst thing that can happen is you end up with more cash than you thought you would have," Mills says.
Putting it all together
"I recommend that business owners do a cash flow projection weekly or biweekly," Mills says. "Things happen quickly in a business, and you need to prepare for them."
By creating projections regularly and anticipating revenues and expenses, you'll increase the accuracy of your forecasts and stay on top of your cash flow.