Mastering Cash Flow Forecasting: The Key to Business Growth

Navigating Financial Challenges and Opportunities with Effective Cash Flow Management

In the dynamic landscape of business finance, cash flow forecasting stands as a critical tool for managing financial health and steering a company towards sustainable growth. Understanding cash flow forecasting—why it’s necessary, how to execute it effectively, and how to use it to guide your business’s growth—can mean the difference between thriving and merely surviving.

Why Is Cash Flow Forecasting Important?

Cash flow forecasting helps companies ensure that they have adequate funds to meet payroll, debt payments, and other expenses. Companies that experience cash flow challenges may need to borrow money to meet their financial obligations. To secure a loan, businesses must meet specific documentation requirements, all aimed at demonstrating their ability to repay. This often involves proving the funding of accounts receivable through various means, including traditional lines of credit, borrowing base lines, factoring, or even alternative financing options—the business equivalent of payday loans.

Understanding your financial needs and when they arise is crucial, and this is precisely where cash flow forecasting comes into play. It’s a proactive tool that prevents situations where a business cannot pay its bills. For business owners navigating through financial tight spots, adopting a weekly cash flow forecasting routine—rather than the 13-month outlook common among more financially stable companies—becomes indispensable.

How to Create Cash Flow Forecast

A cash flow forecast is a spreadsheet that shows how predicted revenue and expenses in a time period affect cash flow. Setting up an effective cash flow forecasting spreadsheet involves several steps:

Step 1. Initial Setup of Your Cash Flow Forecast Spreadsheet

Begin with a 13-column layout to represent each week, plus a column for descriptions. Mark each column with the date that starts the week (e.g., Mondays) or ends the week (e.g., Fridays), however you prefer to look at your data. What’s most important is consistency in titling the columns.

Step 2: Create Sections for Important Numbers

The first line in your spreadsheet should contain your starting balance. Then build out 5 sections to capture key financials:

Section 1: Cash Receipts

This is where you’ll tally up the revenue expected each week. You can be as detailed as you wish. If you have primarily large clients, you might choose one line per client. If you have hundreds of small transactions, you might want to lump them together into one sum.

When entering your revenue forecast, factor in the reality of payment delays. Do not count on clients paying on time. You don’t want to be waiting at the mailbox for a check or clicking “refresh” on your screen to see if a wire has hit your bank account. For example, if you bill today with net 30 terms, you likely won’t see the money for at least 45 days. Enter the amount you expect to be paid in whatever column represents the week in which day 45 falls.

Section 2: Payroll and Contractor Expenses

For your company to continue operating and meeting its promises to clients and customers, you must be able to pay your team. The numbers listed in this section should include wages, of course, as well as reimbursable expenses, payroll taxes, and benefit payments. For example, if your payroll is $13,500, you actually need to plan on expenses of $16,500 or so once you add in the employer’s share of FICA (Social Security), Medicare, FUTA (federal unemployment tax), retirement contributions, etc.

Also remember that your payroll company will be withdrawing money (or at least checking your account) a few days before payroll runs to ensure that you have adequate funds available. If you pay employees on the 15th, put your anticipated expenses in the cash flow forecast for the week of the 13th. If the 15th is a Monday, be forewarned that your payroll company may be checking as early as the Thursday before.

Take the time to doublecheck that you enter anticipated expenses in the right week. A weekly payroll is easy, because you have the same expense each week. A biweekly is also easy, incurring expenses every other week. A semi-monthly payroll can get tricky. Sometimes there may be 2 weeks between payrolls; other times, it might be 3 weeks.

Section 3: Operating Expenses

List significant planned expenditures such as rent, travel, rent and professional advisor fees. Do not worry about small line items, such as office supplies.

A reminder: Accuracy in aligning your income and outgoings is vital.  A common misalignment is when an expense and the revenue needed to pay the expense are listed in the same week. On the spreadsheet, the numbers may work. But in reality, they may not if the expense must be paid at the start of the week and the revenue isn’t expected until the end of the week.

Section 4: Debt Repayment

List all people and/or companies you need to pay. List each type of payment on separate line in this section:

Line 1: Accounts payable, which is every invoice you have to pay in the next 30 to 45 days.

Line 2: Credit card payments due.

Line 3: Funding sources (typically banks), such as Lines of Credit and term loans

Line 4: Alternative financing, such as payday loans. List your weekly payment. (If paying daily, multiple by 5 to get your weekly total.)

Section 5: Net Changes in Your Cash Position

Start by tallying up how much revenue you anticipate receiving, then subtract all of the expenditures in the categories above. This net amount is the amount of the changes in your cash position.

By highlighting the week-to-week fluctuations in your cash position, your cash flow forecast offers insights into periods of shortfall or surplus. If you’re spending more than you receive, the net change in cash position will be negative, because your cash balance is going down. If you’re receiving more than you spend, the net change will be positive.

Ending Balance

The last line in your cash flow forecast should be your ending balance.  This is calculated by subtracting/adding the net changes in cash position from/to the beginning balance.

Utilizing Your Cash Flow Forecast

Update your cash flow forecast every week to reflect actual income and expenditures. If numbers didn’t come in as forecasted, investigate and adjust for future weeks. For example, if revenue didn’t come in as planned, you need to figure out whether it come in all at once, so you’ll get caught up in a coming week … or whether it trickle in during the next few weeks?

Do the same with expenses. If your payroll went up, investigate and find why it happened and whether it will be repeated.

Then reforecast the next 13 weeks. This continual updating process not only helps in managing current cash flows, but also in planning for future financial requirements. Adjusting your payment priorities based on updated forecasts can ensure that critical obligations, such as payroll, are always met.

Common Patterns in Cash Flow Forecasting

Cash flow forecasting reveals patterns in your financial cycle. Companies with cash flow challenges typically see a hefty ending balance just before paying significant expenses. After payment, the balance drops significantly. If you notice this pattern in your cash flow forecast, it’s time to focus on bringing revenue in more quickly and/or consistently.

If cash isn’t coming in as expected, remember that you can adjust delay payment on some bills to help with cash flow. If you need money to come in faster, consider offering clients a discount to pay early. This will cut into profits, but a 2% discount is typically cheaper than accruing interest on borrowed funds, so it may be worth the sacrifice.

As much as possible, avoid being in a position of not having enough cash if a client pays late. Ideally, you should have a working capital balance that covers at least 1.5 months of payroll and debt payments as a safety net.

Use Cash Flow Forecasting to Communicate with Lenders

Use your cash flow forecast to determine how much cash you need and when. If you decide that you need a loan, alert the person in charge how much you need, when you need it, and when it will be repaid.

For example, you may identify that your company needs $100K this week and $40K next week, and that you’ll be in position to repay the loans three weeks hence.   Then go to your cash flow forecasting spreadsheet and enter the repayment amounts in the week in which you intend to repay.

How a CFO Can Elevate Cash Flow Forecasting

The benefit of a cash flow forecast is to look ahead, anticipate problems, and take corrective action to eliminate or minimize the effect of the challenge. A Chief Financial Officer (CFO) can be your secret weapon in this regard.

The job of a CFO is to look forward. (Accountants and bookkeepers, in contrast, look backward and report on what happened in the past.) A good CFO can use a cash flow forecast to predict cash needs and identify periods of surplus or shortfall. This foresight allows for strategic financial decisions, such as securing loans or investing in growth opportunities, tailored to your business’s unique situation.

A good CFO also has connections and relationships that can be leveraged to help you navigate cash flow challenges. For example, if your CFO predicts that you’ll have a cash flow shortage in four weeks, she can tap her network to help you secure funding to cover the gap. CFOs often have knowledge of resources many business owners don’t know exist. CFOs also can help you prepare your financials to qualify for the best terms from respected lenders.

Cash flow forecasts are about more than trying to juggle expenses. Your cash flow forecast may predict a surplus of cash. A trusted CFO can suggest ways to use it strategically to help your organization achieve its goal. For instance, it might be best to put your surplus cash in a CD to earn interest that can be reinvested into business growth. Or perhaps the surplus can be used to pay down a debt or invest in equipment that will reduce operating expenses. CFOs are able to run the numbers on multiple scenarios, ultimately helping you choose the best path forward.

Cash Flow Forecasts Are Strategic Financial Planning Tools

Cash flow forecasting is not just about keeping your business afloat; it’s a strategic tool for growth. By accurately predicting financial needs, managing obligations, and planning for the future, businesses can make informed decisions that propel them forward. With the expert guidance of a CFO, companies can transform their cash flow management into a powerful engine for success, ensuring they are well-equipped to meet their goals and embrace new opportunities in today’s competitive business environment.

Share:

Facebook
Twitter
Pinterest
LinkedIn

Let’s Talk

Book a complimentary, 45-minute
Strategies & Solutions Session:

Get 7 Costliest Mistakes Report

Discover the most dangerous financial mistakes that women business owners make – and how to avoid them to maximize growth.