Cash Flow Planning for Small Businesses

In the world of small business accounting, one of the most critical aspects to manage is cash flow. Cash flow forecasting helps business owners and financial professionals anticipate the inflow and outflow of funds, allowing them to make informed decisions and ensure the smooth operation of the business. In this blog post, we will guide you on how to create cash flow forecasts for your small business.

What is a cash flow forecast?

A cash flow forecast is a financial tool used by businesses to predict their future cash inflows and outflows over a specific period. It helps businesses anticipate cash shortages or surpluses, enabling them to make informed decisions about investments, expenses, and financing. By forecasting cash flow, businesses can ensure they have enough cash to cover their obligations, avoid liquidity issues, and plan for future growth or expansion.

A small business owner should create a cash flow forecast regularly to:

• Anticipate Cash Shortages: Identify potential cash flow problems and solutions before they occur
• Manage Cash Flow Efficiently: Ensure that the business can meet its financial obligations, such as paying suppliers, insurance, rent, and employees on time.
• Make Informed Decisions: Base investment, expansion, and other strategic business decisions on accurate financial projections.
• Secure Financing: Provide lenders or investors with a clear picture of the business’s financial health and future prospects.
• Optimize Cash Management: Adjust spending and revenue strategies to maximize cash flow and minimize borrowing costs.

Read our previous article, “The Difference Between Profits and Cash Flow.”

The Foundation of Cash Flow Forecasting

Before diving into cash flow forecasting, it is essential to have a clear understanding of your financial statements. Get familiar with your income statement, balance sheet, and cash flow statement – these will serve as the foundation for your forecasting process.

1. Analyze Historical Data: Start by reviewing your past financial records to identify patterns and trends. Examine previous cash flows, including sales, expenses, and any major cash inflows or outflows. This analysis will provide you with valuable insights into your company’s financial performance, enabling you to project future cash flows more accurately.
2. Forecast Sales: Sales are the lifeblood of any business, so it is crucial to estimate future sales accurately. Consider factors such as market trends, customer behavior, and any upcoming promotions or events that may impact your sales. Divide your sales forecast into different categories, if applicable, to gain more clarity and accuracy.
3. Track Expenses: Closely monitor your expenses to ensure you don’t encounter any surprises. Identify your fixed expenses (rent, utilities, salaries) and variable expenses (materials, marketing, utilities) and forecast them accordingly. Look for areas where you can potentially cut costs or optimize spending to improve your cash flow.
4. Consider Timing: Understanding the timing of cash inflows and outflows is essential for accurate cash flow forecasting. Identify payment terms for your customers and suppliers, and factor in any seasonal variations or irregularities that might affect the timing of cash flows. This consideration will help you plan for periods of low or high cash balances.
5. Be Realistic and Conservative: While optimism is essential in running a business, it is crucial to be realistic and conservative when forecasting cash flows. It’s better to underestimate your inflows and overestimate your outflows, as this will help you be prepared for any unexpected cash shortages or emergencies.
6. Regularly Review and Adjust: Cash flow forecasting is not a one-time exercise; it requires regular review and adjustment. Compare your actual cash flows with your forecasted figures, identify any deviations, and analyze the reasons behind them. Use this information to refine future forecasts and make more accurate predictions.
7. Utilize Technology and Seek Professional Assistance: Leverage accounting software and financial tools to streamline your cash flow forecasting process. These tools can automate calculations, track expenses, and provide real-time insights into your financial position. Additionally, consider seeking assistance from a fractional CFO (Chief Financial Officer) who specializes in small business accounting. They can provide expert guidance and help you create accurate and actionable cash flow forecasts.

Cash flow forecasting is a crucial aspect of small business accounting, as it allows you to anticipate and manage your company’s cash inflows and outflows effectively. The best practice is to begin forecasting immediately. Seek the help of professionals like Westport Financial CFO, if you need help starting.

Read more in our previous article, “Small Business CFO: What They Are and How They Can Help.”

How to Build Your Own Cash Flow Forecast:

Building a cash flow forecast is a crucial task for any small business owner. It helps you predict and plan for your company’s cash inflows and outflows, ensuring you have enough working capital to sustain your operations. Your accounting software may have the ability to forecast cash flow – it is important to use all of the tools at your disposal. To create a cash flow forecasts, gather your financial records and a spreadsheet and track the data.

Download a Free 13 Week Cash Forecast Template

Here are the steps to create your own cash flow forecast:

1. Gather Financial Statements: Start by collecting all your bank statements, credit card statements, loan statements, and any other relevant financial documents. These statements will provide the necessary information to accurately track your cash inflows and outflows.
2. Match Outflows to Statements: Analyze your financial statements and identify your cash outflows. Categorize expenses such as rent, utilities, payroll, loan payments, and any other regular or recurring payments. Match these outflows with the corresponding entries in your financial statements and record them in your cash flow forecast.
3. Forecast Inflows: Estimate your cash inflows based on available sales data, historical information, and other accessible data sources. Analyze your sales records and identify patterns or trends to help you forecast future sales. Consider market conditions, customer behavior, and any anticipated changes in your business environment.
4. Create a Master Inflows and Outflows Calendar: Develop a calendar that captures both your projected inflows and outflows details. Cover a rolling 13-week forecast to provide visibility into your future cash position. By having a master calendar, you can easily visualize and plan for your cash flows.
5. Look One-Quarter Ahead: By projecting your cash flows for at least one-quarter ahead, you can identify potential ups and downs in your working capital. This allows you to plan for any shortfalls or surpluses and take proactive steps to manage your cash position effectively. Understanding your future cash needs enables you to make informed decisions about investments, inventory management, and working capital optimization.

Westport Financial: Cash Flow Forecasting

Imagine a small business experiencing seasonal sales fluctuations after a rapid growth phase financed through debt. They predicted a significant cash shortfall during the off-season by implementing a cash flow forecast. This early warning allowed them to secure short-term capital in advance, ensuring they had enough funds to cover expenses and avoid defaulting on payments. Without this forecast, the business might have faced unexpected financial strain, potentially leading to failure.

Creating your cash flow forecast requires careful analysis of your financial statements, sales data, and market trends. It’s essential to regularly revisit and adjust your forecast as new information becomes available.