Diving into Cash Forecasting

Diving into Cash Forecasting
Diving into Small Business Cash Forecasting

We all know cash is king. Cash is also the number one reason companies go out of business. I’m always amazed by the number of business owners who don’t use a cash forecasting tool to manage their business. Unless you are one of the lucky businesses with plenty of cash in the bank, here are some simple steps you need to dive into managing your small business’ cash flow.

There are ways to make small business cash forecasting more complicated, but here’s a great place to start.

Beginning Cash Balance
+ Expected Cash In for the week
– Cash Out for the week
= Foretasted Cash +/- for the week
Repeat for 12 weeks into the future

Step 1: Beginning Cash Balance

What is your current cash balance? Hint, it’s your bank balance, less any outstanding checks you’ve mailed but have not yet cleared your bank account.

Step 2: Cash In

What cash do you expect to collect over the next 12 weeks? Start with an Accounts Receivable Report from QuickBooks. Go line by line and record it in the week you expect to receive payment.

Next, what sales do you have in your pipeline? Do you expect to close any of those deals in the next 3 months and collect payments? If so, enter those expected sales deposits in the weeks you expect to receive payment from future customers.

Be realistic. The worst thing you can do is to be over optimistic. This will most likely result in an overstated cash forecast and will not be a reliable tool to grow your business.

Step 3: Cash Out

What are your cash out flows over the next 3 weeks? Payroll, credit card payments, loan payments, line of credit payments, health insurance premiums, rent, business insurance, contractors, other vendor bills, etc.

Fill in your regular monthly expenses (rent, payroll, utilities, loan/credit card payments, insurance, etc).

Next, pull an accounts payable report from QuickBooks and record your vendor payments when you expect them to go out.

Don’t forget any future bills you expect to receive, but have not yet come in. Are there costs and bills that are related to future sales? Advertising bills that have not arrived in the mail yet? What about contractors you pay on a monthly basis?

Don’t forget to include tax payments due as well. Payroll taxes and quarterly estimated tax payments also need to be forecasted.

Step 4: Total

Total the beginning balance + cash inflow – cash out flows for each week. The ending balance for the week before becomes the beginning balance for the next week. This continues to roll forward for 12 weeks into the future. This will give you a snap shot as to where your cash is expected to be at the end of each week. You can see when you’ll have cash surpluses and when you have cash shortages. This gives you a tool for planning and to helps business owners avoid nasty cash flow surprises.

Step 5: Update Weekly

Now that your cash forecast tool is built, it’s important to update on a weekly basis. This is where the magic happens! Compare your actual weekly cash results against your forecast. What did you learn? What changes do you need to make to future weeks? Did a customer check arrive sooner than expected? Did a vendor offer to extend your credit terms? Did you close a new deal that needs to be added? Don’t forget to add another week to the end, to keep a rolling 12 week cash forecast going.

Need help? Give us a call! Weekly cash forecasting is a great addition to your monthly bookkeeping and accounting services. It helps you keep a better pulse on your business and allows you to be proactive in growing your business.