6 tips for creating a cash flow forecast, to help grow your business

1. Cash flow is more important to monitor than profits.

Too many business leaders rely on the monthly profit and loss (P&L) statement to gauge cash flow. Your P&L is important, but it’s not an accurate picture of the cash flowing into and out of your business.

The cash flow statement is the go-to document to understand the cash needs of your business. That’s because it factors in noncash expenses, such as depreciation and amortisation. It also reflects cash outflows and inflows from operating activities (accounts payable and accounts receivable payments), investing activities (purchases of fixed assets of plant, property and equipment) and financing activities (sales of equity or bank borrowings). You can’t create a useful cash flow forecast until you first learn the ins and outs of your business’s cash flow statement.

2. Know your company’s cash conversion cycle.

Understanding your company’s cash conversion cycle — the amount of time it takes for a dollar spent to make its way back into your bank account — is essential to managing and maximising your cash flow. Business leaders should spend time with their finance and accounting chiefs to comprehend how money is flowing into and out of the company from vendors and clients. Review variable costs (labor and raw materials, for example), fixed costs (rent, utilities, certain salaries and business insurance) and other significant expenses (investments in equipment or software, for instance). The accuracy of the forecast depends on knowing the timing and amounts of revenue and expenses that affect your cash flow.

3. Don’t forget seasonality.

Chances are your business experiences some seasonality. There are bound to be months when clients are more active in purchasing your company’s products or services. Seasonality can have a material effect on the cash flow of your business. A good cash flow forecast will anticipate when cash outlays and cash receipts are higher or lower so you can better manage the working capital needs of the company.

4. Create multiple scenarios.

To succeed, business leaders should prepare for market changes. Craft a few different cash flow scenarios so you are not caught off guard if client demand slows. Having a couple of models will help you act decisively — rather than react defensively — to mitigate any adverse effect on your company’s cash if revenue slows. Conversely, if sales pick up, the forecast will help you to better allocate resources to grow the business.

5. Build monthly, quarterly and annual forecasts.

Stay one step ahead of the game and build cash flow forecasts for the short (weekly or monthly), medium (quarterly) and long (yearly) term. The needs of the business will dictate which time frame is the most valuable. Monthly or quarterly forecasts generally are more useful for stable, established businesses. Weekly projections will be essential for companies scaling up or going through significant changes, such as a restructuring or merger/acquisition.

6. Review. Adjust. Repeat.

Once you build a forecast, review it often, and revise as needed. I’ve worked with a lot of business leaders who haven’t looked at their cash flow forecast in months. The needs of your clients are always shifting, and the economy is ever-changing. Revisiting the forecast will help you respond and adapt faster than the competition.

Building a business requires cash, and having a reliable forecast allows you to make better decisions on how to maximise the return on invested capital. Follow these tips, and you will be able to better predict the cash needs of your business and better position your company for future growth.

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