Cash is one of the most important elements in business, the lifeline that keeps your business a going concern. When cash flow dries up, a business goes bankrupt. Hence, small business owners and large should keep a tab on the cash flows and ensure there is enough to meet the working capital requirement and contingencies. It requires business owners to prepare a weekly, monthly, or quarterly cash flow forecast depending on the business.

What Is A Cash Flow Forecast? 

A cash flow forecast is a futuristic ledger. On one side is how much cash will come from client payments, interest, or other non-operating income. Conversely, the amount of cash will go out as payments to suppliers, creditors, employees, and expenses. 

A positive gap between the two columns is surplus cash, which means smooth cash flow. If the gap is negative, you fall short of cash and need liquidity through credit, overdraft, or other short-term funding. This insight can save you from payment delays and last-minute expensive loans that could impact your business credit score. 

Now that you know what a cash flow forecast is, how can you make one? 

How Can Small Business Owners Prepare A Cash Flow Forecast

  1. Decide forecast period: Determine how far you can accurately predict your cash flows. Small businesses may not have a base history to understand the income and expenses needed for the forecast. Hence they might opt for weekly or monthly forecasts. A stable business might make an annual forecast. But in uncertain times like increasing interest rates and rising inflation, consider weekly forecasts. 
  2. List all income and expenses: Prepare a column, divide it into income and expenses and list all possible cash transactions from utility bills to royalties and cash back on the business credit card. Prepare more columns and write down week 1, week 2, week 3, week 4, and the month. Now it’s time to fill those amounts. For instance, if your $500 rent is due on week 3, write rent in the Expense column and put -$500 in the Week 3 column.
  3. Carry forward your bank balance and any hard cash in the office. 
  4. Compare the actual with the forecast: Make a table similar to your forecast table on the right side of the ledger book and report the actual cash flow. Compare the two to identify the discrepancy percentage and add that as an error term in the next forecast.

This way, you can make a cash flow forecast. But business is dynamic. You can include different scenarios to forecast a low and high range. For instance, you can prepare a cash forecast with a 6% inflation and 5% interest rate. 

These scenarios can help you make cash provisions for a contingency or opportunity through a cash reserve or a credit facility available if your business is in need. 

How Does Cash Flow Forecast Helps Small Business Owners?

Remember, you can change the forecast period and even update the forecast to reflect the latest factors. The cash flow forecasts help you stay on top of your bill payments and budget expenses. Cash flow projections can also be useful when making a financial decision, like buying equipment, taking a huge order, or increasing marketing expenses. 

Your cash flow projections can tell you if you have enough surplus to continue with your ambitious marketing plan. Similarly, these projections can also keep your risk in check. 

For instance, a significant chunk of your cash flow comes from a major client. If you suddenly lose the client or the client halves his business, your cash flow projections can tell you if you can continue operating or must undertake significant cuts. The most important function of cash flow forecast is to minimize the need for borrowed funds. 

When your business is new, you can make projections. But as you grow, hire an expert to handle the cash flow forecast. A certified accountant can prepare projections for a small business to manage daily cash flows and prepare a working capital budget. You can hire expert CFO services for more detailed financial insights and strategy development. 

Contact Glenn Graydon Wright LLP in Oakville for Cash Flow Forecast and Other CFO Services 

A skilled CFO or controller can help you plan your finances, from raising funding to efficient capital deployment through budget planning. At Glenn Graydon Wright LLP, our CFO services can provide services to support your cash flow and business forecasting. In addition, we can provide you with accounting services to review the effective implementation of the financial plan. To learn more about how Glenn Graydon Wright LLP can assist you with CFO expertise, call us today at 905-845-6633, or connect with us online, to schedule your initial consultation.