Cash Flow Forecasting: Insuring Your Company’s Future

I have posted five entries about cash flow. It is perhaps the most important concept to understand for a small business owner.

Profit (or EBITA as I describe it) is not cash flow. A company that is realizing strong EBITA does not necessarily have good cash flow. Since most small businesses are undercapitalized and have difficulty obtaining external financing, using a cash flow forecast is essential.

I often strongly urge my clients to begin using a cash flow forecast, especially when sales and accounts receivable are growing rapidly, a business is new and often under-capitalized, sales are seasonal or cyclical, or when there is a slump in revenues. Once a client begins using a cash flow forecast, they often don’t stop. It becomes a weekly 45 minute process when an owner evaluates where they have been for the past week and adjusts the forecast for the weeks ahead. Many of my clients have their in-house bookkeepers keep the entries up to date, but every owner should know how to forecast cash flow and should use this tool on a regular basis when conditions require.

When properly used, a business owner can predict a short-fall of cash many weeks in advance, thereby having time to resolve the shortfall. By working accounts receivable (collections) cash comes in quicker, thus relieving a potential shortfall. When cash flow is tight, working the accounts payable can help. Most businesses will need some form of external financing, whether it is obtained from a traditional bank, non-bank lender, friends and family, or by the owner putting additional equity into the company.

I have not found commercially available software for cash flow forecasting that I believe is worth the cost. Such software may be available and affordable, but I have not been able to find it.

I have found one model cash flow forecast that is free and publically available. This model appears be provided by the SBA. It is designed for businesses that are starting up and the forecasting periods are 12 monthly periods. This forecast would be best used for planning for a business seeking cash from a lender or when starting up so an owner can insure he can have cash for the first full year of operations. Based on my 15+ years of lending experience, showing up to a commercial lender with a well thought out cash flow forecast will set you aside from all other borrowers.

The Cash Flow Forecasting model designed in Excel - I designed myself after having not found a good model in the public domain freely available. It is a 13 week forecast and is designed to be updated each week. Friday mornings are the best time to use this, as it allows a business owner to begin planning for subsequent weeks. In the beginning of use, it might take an hour or more to make changes, update and review. The model I have designed is simple, easy to use and may be modified easily to suit a particular business’ circumstances. It may be freely distributed as long as it is not sold. I will generously give my time guiding any business who wants to use it. That is how strongly I believe in the importance of cash flow forecasting!

I welcome any suggestions and if you modify it in a way that would benefit other small business owners, I would appreciate you sharing your modifications with me. I will repost and make available to others at Allbusiness.com.