How to Prepare a Cash Flow Forecast

by | Sep 28, 2021 | business finance

Cash flow is simply the money that comes in and out of your business on a regular period. Primarily, cash inflow is the money that comes in from your sales or other sources such as the sale of assets or debt repayments to the business. Cash outflow contains the usual expenses from operating a business such as salaries and wages of the employees, monthly bills, payments to creditors and suppliers, maintenance and repairs expenses, and other expenses that may be incurred by the business based on its industry.

As much as the balance sheet, income statement, and other financials of the company are crucial in making business decisions for the business, the business’s cash flow is important because this is where the business owner will see whether the company has enough resources coming in and out to sustain the operations of the business on a regular basis. It is very important that the cash flow is forecasted properly to come up with a business strategy and plan to keep the business liquid. A timely and relevant forecast puts the business in a better position with a more positive cash flow, meaning, there is more money coming into the business rather than money that’s going out from it.

business partners doing sales forecast

Intelligently forecast your sales and cash inflow

If you have been in business for quite some time, references from your previous month’s sales or even from last year’s would enable you to forecast sales for the same period. This may be a tall order but since the business relies heavily on its sales, it is important to be able to see the pattern and figure out what needs to be done in order to keep the business on a positive cash flow. If you are new in the business and a previous period’s sales are not available, estimating the business’s expenses or outflows will be very helpful in order to forecast the sales needed for the period to keep up with the business operations. Also, being able to forecast possible sources of cash inflows to the business is also essential in coming up with a cash flow forecast. There may be plans of selling assets and possible infusion of additional capital and these factors should be incorporated in coming up with an intelligent cash flow forecast for the business for a given period.

Estimate your cash outflows

Businesses have a usual schedule of expenditures for the month, and it is vital to keep this schedule constant as it helps keep the business budget in place. The sooner this is in place, the more accurate your forecast would be in adjusting to the cost of goods sold (primarily for marketing and sales drives), to an eventual accurate and realistic forecasting of your sales to meet all these financial obligations. These outflows or expenditures may be used for business operations or administrative expenses.

Review estimated cash flows against the actual cash flow of the business.

It is important to keep your accounting records updated, especially your cash flow statements, in order to see the patterns in your sales or income as against your business expenses. From this activity, you will be able to see how your business fared in the previous periods to keep tabs of where to adjust on your spending if the actual cash flow did not quite meet the expectations for the period as against the forecasted cash flow statement for the incoming period. Consequently, these reviews would also show as to where cash inflow was good so it would be easier to either maintain it or target higher sales figures for a better yield.



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