WHAT IS A CASH FLOW FORECAST AND WHY DO YOU NEED IT?

When things are going well in business, most entrepreneurs adopt the mantra, “Grow baby grow!” 

One of the mistakes entrepreneurs make is, while they reinvest money back into the business expense infrastructure, they rarely manage to the business balance sheet, and even less so to the personal balance sheet. 

When it comes to cash flow forecasting, one of the mantras for 2021 is that every single dollar of revenue has to add a dime or five cents to the business balance sheet, and some of that has to end up on your personal balance sheet for liquidity. 

We all know that “Cash is King,” but the pandemic reinforced that it’s only really king when it’s present on our balance sheets. The coronavirus pandemic certainly underscored the importance of having visibility into your business’s cash flow.

The tool that gives you that visibility is the cash flow forecast. Here are the details and why you need it: 

What is a cash flow forecast?

A cash flow forecast is a tool that estimates the cash coming in and out of your business, across your entire business over a certain period of time. It provides data that is accurate, timely and able to be acted upon to achieve your goals. 

It includes your starting cash position, expected revenue, expected fixed expenses, expected variable expenses, financing activity, and ending cash position.

Where things get muddy

Many entrepreneurs confuse profit and cash flow. Profit is the balance after operating expenses are subtracted from its revenues. Cash flow is the net balance of cash that is moving in and out of a business at a certain point in time.

Because they have their eye on profit, some entrepreneurs refer to their profit and loss statement to make decisions. While the P& L is a great tool, it’s a historical snapshot. 

For a true picture of your business, we recommend using the cash flow forecast because it gives you greater control of variable costs, which can help you when sales and revenues are down. 

Why you need a cash flow forecast

Here’s what a cash flow forecast can bring to your business and why you need it:

• It helps with decision-making. You’ll have an accurate picture of your financial position, allowing you to make better decisions about hiring more team members, changing your prices, switching suppliers, and many other business decisions.

• It minimizes your risk. You can see the impact on your cash flow before you make a decision, tilting the odds in your favor.

• It builds investor confidence. With the forecast, you can demonstrate fiscal responsibility and build trust with lenders, banks and investors. The cash flow forecast is a way for them to accurately assess the financial health of your business.

• It helps manage your cash flow surplus. The cash flow forecast helps you understand when and where you’ll have a cash surplus so you can decide what to do with it.

• It helps you plan for growth. You will have the foresight to know if your business can fund your strategic plan for growth, or if you should consider outside resources.  

Gerber LLC hosted a webinar with Randy Gerber and Vince Stasiulewicz of Hylant about the importance of cash flow forecasting in your business. Their event, “Predicting Financial Success: Developing an Appropriate Cash Flow Forecast” dove into the details. If you’d like to learn more you can watch the replay here, or visit our website for more information.

Do you have a cash flow forecast for your business? How are you using it? Share with us on Facebook, LinkedIn and Twitter!