Most small business owners just want their accounting done so they can focus on doing what they love. But tracking and forecasting cash flow—despite the time and effort required—is essential for starting, operating, and expanding a business.
In 2018, CB Insights analyzed 101 failed startups and found that running out of cash was the second most common cause of failure, impacting 29% of businesses.
To avoid that fate, you need a cash flow forecast to help you estimate how much your cash outflows and inflows will affect your business.
A cash flow forecast (also known as a cash flow projection) is like a budget, but rather than estimating revenues and expenses, it estimates cash coming in and going out based on past business performance.
It's not uncommon for a business to experience a cash shortage, even when sales are good. This usually happens when customers are allowed to pay after the product or service is delivered. In cases like these, a business owner must plan how they will cover costs before receiving the payment.
For example, say Hana Enterprises ships $50,000 worth of security products to customers in January, along with invoices that are due in 30 days. The company will have $50,000 of revenues for the month but won't receive any cash until February. On paper, the business looks healthy, but all of its sales are tied up in the accounts receivable. Unless Hana Enterprises has plenty of cash on hand at the beginning of the month, they will have trouble covering their expenditures until they start receiving cash from clients.
With a cash flow forecast, you ignore sales on credit, accounts payable, and accrued expenses, instead focusing on the revenue you actually expect to collect and the expenses you actually expect to pay during a given period. You can also use the information provided on past cash flow statements to estimate your expenses for the period you're forecasting for.
Cash forecasting may sound like something boring that accountants do in big companies. Not so! It's absolutely essential for every single business. Here's why:
To make this a lot easier, we've created a business cash flow forecast template for Excel you can start using right now.
The template has three essential pieces:
Here's an example of a completed cash flow projection for a three month period:
Hana Enterprises, Inc.
Cash Flow Projection
January to March 2022
As you can see from the example above, Hana Enterprises expects to have a cash shortage in March. This results from a negative net cash flow (when more cash goes out than comes in). Knowing that information ahead of time, the company can take steps to prevent the shortage from occurring.
Hana Enterprises has several options to avoid this shortage in March. They might secure a line of credit from the bank, purchase fewer computers in February, negotiate longer payment terms from vendors, contact late-paying customers to speed up the collection of receivables, or take other cost-cutting measures to reduce their overhead expenses.
How Accracy can help
Use Accracy's simple, intuitive platform to get all the information you need to project your cash flow. Each month, your transactions are automatically imported into our platform then categorized and reviewed by your personal bookkeeper. Accracy helps you stay on top of your business's top expenses so you can make informed budgeting decisions on the fly.
Keep in mind: a cash flow forecast isn't something you create once a year and never look at again. It's a living, breathing business tool you should review and update on a monthly basis.
Though projections are helpful, they can't perfectly predict the future. As the months pass, you should expect to see that your projections aren't quite matching up with your actual results. That means it's time to re-run your forecast to take into account these differences.
To improve the accuracy of your cash flow worksheet, consider the following:
Your cash flow forecast is key to good cash flow management. Try to account for all cash sources and uses in your projection and maintain an emergency fund or backup plan to ensure you don't get sidelined by slow-paying customers or unexpected expenses. When you do, this simple but valuable tool can help you keep an eye on cash and ensure you don't compromise growth or put your business in jeopardy.
We are offering free 1 Month Basic Bookkeeping to all new customers so you can experience Accracy's seemless and professional services.
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