Cash Forecast Basics - BC Bookkeeping Tutorials|

Go to content

Cash Forecast Basics

Cash Forecasts
Does my praying cartoon buddy illustrate how you manage your cash ? Don't get me wrong, a little praying can't hurt; but, you also need to do some planning on your own ! Many of the small businesses that I have been around don't make use of a simple tool the Cash Forecast that can provide them with some restful instead of sleepless nights worrying about bills. I really don't know why, because a Cash Forecast (as you'll learn in this lesson) is not that difficult to prepare once you know how.

Other names used to identify this tool are a Cash Budget or Cash Projection.

Cash is a business's most precious asset. Managing Cash Flow is one of the most important tasks every top manager and business owner must be able to understand. Believe it or not, many businesses have had to shut their doors not because they weren't making a profit, but because they weren't managing and controlling their cash.

If you recall, we learned earlier how Profits and Cash Flow are both critical elements needed for a business to survive and be successful ! Good Cash Management is also just as important as making a profit. Great cash management is even better.

Good projections and accounting records are important tools for the success of a small business. While outside accountants are sometimes necessary to help, you can save some money by producing your own projections.

What is a Cash Forecast ?

  • A Cash Forecast is simply a tool that a businesses uses to plan:
    • How Much and When is Money Coming In and From Where (source) ?
    • How Much and When is Money Going Out and For What (types of payments) ?

In other words,a cash forecast is just an estimate of your business's cash inflows and outflows over a certain period of time. Cash coming in is called a cash receipt and cash going out is called a cash disbursement. If cash receipts are greater than cash disbursements during a period, the business has what is called a positive cash flow. On the other hand, if cash disbursements are greater than cash receipts during the period the business has what is called a negative cash flow.

We'll elaborate a little.

A Cash Forecast identifies when cash is expected to be received and where this cash will come from (source) and also when it must be spent to pay bills and debts and what the payments are made for.

Creating a Cash Forecast requires you to make reasonable estimates about what will happen in the future. In order to help predict the future, historical data when available is used and modified to reflect future expectations. For new start up businesses, an analysis of similar businesses and current market conditions provides help in preparing the needed estimates. Factors to consider when preparing the estimates include competition, local economic conditions, and the business's financial structure, capacity, and capabilities.

Cash Forecasting and Planning requires experience and judgment in order to determine such items as expected sales, purchases, and operating expenses.

A Cash Flow Forecast or Budget can be prepared for any period of time, a day, week, month, year, or even many years into the future. I recommend that you at least prepare a one year budget by month. It should be reviewed and revised periodically to reflect actual performance and any changes in plans.

By using this tool and analyzing your projections you can see the fluctuations in cash flow and take corrective actions to avoid potential shortfalls.

I'm amazed at how many small businesses don't take advantage of this simple tool that I consider one of the most valuable tools management has for monitoring, controlling, and changing the day-to-day operation of a business. Are you one of them ?

What Does A Cash Forecast Look Like ?
I thought you'd never ask.

Where do you think most of the cash a business receives comes from ?

Now, this is no trick question. Of course it comes from the Sales of products and/or services that the business bills its customers.

When does the business receive this cash ?

It depends on your type of business and what credit terms that you need to offer to your customers. For example, if you give your customers 30 day terms, you have to wait 30 days in order to collect your money. On the other hand, if most of your sales are cash or "counter" sales, you receive your cash at the time of the sale.
On what do you think a business spends a good portion of its cash ?

  • Let's list a few of the "biggies".
  • Purchases of Products for wholesale and retail types of businesses that sell products.
  • Payroll and Fringe Benefits.
  • Manufacturing Costs for businesses that make and sell products.
  • Federal and State Taxes and Licenses.

When does the business have to pay for these type of expenditures ?

When a business pays its employees depends on the payroll policies that the business has set up. Nowadays, due to the use of computers and payroll software, it's a fairly common practice for businesses to pay their employees each week.

In the case of purchases, it depends on the credit terms that suppliers have granted to the business. One of the worst cases is COD which stands for Cash On Delivery. This means the business has to immediately pay for the purchases when they receive the goods. If the business has been granted more liberal terms such as 30 day terms, they can wait 30 days before they have to pay for the goods that they purchased.

When the payments for taxes and licenses are required is regulated and set by the states and federal government.
What's involved in preparing a Cash Forecast ?

There are five basic steps to creating a cash flow projection:
  • Gather up your historical financial information, develop and state your assumptions, and select the time period(s) covered.
  • Estimate sales and their collections for the time periods you want to cover by period.
  • Identify and estimate amounts and the period collected for other sources of cash.
  • Identify and estimate amounts for all items that you have to pay for and when (period).
  • Enter and formally summarize information on worksheet(s).

Why do you need a Cash Forecast ?

Hopefully this does not picture you and how you have to handle your creditors or employees when they need to be paid !
The answer to this question is simply to ensure that you have enough cash on hand to pay your bills, employees, and notes when they become due and obtain any needed equipment. The forecast helps you identify potential shortages of cash and allows you to take actions to correct the problem before it occurs. The day you run payroll and don't have the cash to cover it is not the best time to try and find a solution.
How Does a Cash Forecast benefit you ?

Forecasting allows you to plan for, identify, and take action in the following areas:
  • Identify Business or Seasonal Fluctuations (peaks and valleys in your sales).
  • Ensure that cash is available to handle employee's payroll.
  • Ability to foresee and handle Note Repayments.
  • Ability to foresee, handle and make timely payments to Suppliers.
  • Be alerted to Short-Term Borrowing Needs.
  • Plan for Long-Term Financing Needs.
  • Plan for Reducing your Outstanding Loan Balances.
  • Plan for Needed Equipment Purchases (Capital Expenditures).
  • Take Advantage of Supplier Early Payment Discounts.
  • Plan Inventory Levels and related Purchases.
  • Monitor Customer Payments and Revise Customer Credit Policies and Terms if needed.
  • Determine what to do with "Excess" Cash if your fortunate enough to have this "problem".
    In other words, how much you have that you can invest and increase your earnings.
What Are Your Forecast Period Options ?

In other words, how long into the future do you prepare the Cash Forecast ? This is often referred to as the Time Horizon. All this fancy word means is the number of period(s) that you want to prepare an estimate for.

  • Your choices are:
  • Short-Term - one week to one month (you could if you wanted to even forecast one day)
  • Medium-Term - one month to one year
  • Long-Term - one year or longer

Note the shorter the time frame, the better your estimates should be. In other words, it's easier to predict what will happen next month than it is to predict what will occur five years from now.

What's next ?

Cash Forecast Needed Information

Back to content