Having a good cash flow forecast can mean the difference between thriving and closing your doors in a rough economy. Even in a fast growing business having a strong cash flow forecast can mean insuring that ever changing working capital needs will be met.
With most accounting reports the goal is to have 100% accuracy. The balance sheet and income statement items should properly reflect the true and accurate historical record of income, cost, or value. A cash flow forecast isn’t a historical record of performance, rather it is a projection of future items affecting cash in and cash out of a business. Since a cash flow forecast is just that, it isn’t necessary to pour over the forecast for 100% accuracy like you do your historical financials.
There are some general rules that can be used to effectively produce a valuable cash flow forecast:
- Consider the document a “living” document. Update it weekly during times of tight cash flow and rapid growth.
- Determine the top 5-6 items of cash in or out that affect the forecast the most. Focus most of your time on those items. For example, when thinking about cash in, consider weekly revenue, A/R collection as two of the top issues to forecast as accurately as possible. Payroll is a good example of a cash out item to focus as much accuracy as possible on. The 80/20 rule applies. 80% of the accuracy of the forecast is going to be determined by 20% of the items being estimated.
- As weeks move forward, look at how close your forecast matches historical data. Though it is not always possible to determine with great accuracy why you might be off on your forecast, over a few weeks it is usually possible to figure out where your forecast tends to vary from actual performance. Focus on the repetitive categories that represent the 80%.
- Frequent measure your A/R days of turn. Faster turn means a quicker collection which means more cash in for a week. Slower turn results in the opposite.
- Be patient. It takes one or two months to become “one with your cash flow forecast.” Once you feel like it is really helping manage your cash you won’t stop doing it.
Several months ago I talked to a business owner who has been using weekly cash flow forecasting for 15 years. She started during the last economic downturn, used it during a period of great sales and has used it every week since starting. She says her business would have folded many years ago had she not began using a weekly cash flow forecast.
AllBusiness readers can download a free Microsoft Excel based cash flow forecast for their use. The first page has directions on how to use it; the second and third pages are for entering A/R and A/P collection data. Feel free to modify this forecast to best meet your businesses needs. It has been used in hundreds of businesses and many have recommended changes that have been integrated into the current version.
If you have any changes you would like to recommend that will benefit all users please feel free to write me and I will incorporate them into future versions.