4 Simple Steps To Accurately Predict Cash Flow

Every business owner knows the only way to keep your business alive is by controlling your cash flow. It’s easy to get lost in the minutia of running a business, like managing projects, creating marketing campaigns, and conducting R&D. But, at the end of the day, all of these activities will cease if your business doesn’t have cash coming in the door.

According to a US Bank study, 82% of companies fail because of inconsistent or insufficient cash flow. Whether you handle your finances independently, have an accountant on staff, or outsource a CFO or fractional CFO, it’s critical that every business owner fully understands their future finances to make better financial decisions today.

Creating a cash flow forecast is the number one way to gain insight into your business.

Your cash flow forecast helps you predict and track future profit and loss under varying conditions. It’s not hyperbole to imply that cash flow forecasts can provide a glimpse into the future. Your financial projections can serve as an “early warning system” to identify shortfalls in your cash flow, allowing you ample time to cut costs and generate more sales. Your forecast can also help you plan for growth by knowing if you have the funds to expand to new markets, hire more staff, or initiate large marketing campaigns.

If you don’t have an accountant at your fingertips, here are some simple steps to help you predict your cash flow accurately and give you peace of mind about your company’s future.

It’s important to note that the more data and information you can get regarding cash flow, the better you can understand what drives your numbers.

1. Determine your timing: Decide how far out you want to plan (thirty days? Six weeks? One year?). If you’re an established business, you can usually project further out because you’ve had more time to collect data, resulting in a more accurate calculation. However, new companies have less information to pull from, so forecasting far into the future will likely lead to inaccurate results.
2. Identify your inflows: First, don’t mistake inflow for revenue. Your revenue is all of the cash that’s generated from sales. But, inflow goes beyond revenue and includes all the money coming into the business, including tax refunds, investments, grants, etc. Identifying inflow means adding up all your sales and non-sales income as it hits your bank account within your determined time frame.
3. Identify your outflows: This is when you list all the money you will be spending over the upcoming period (monthly, quarterly, etc). This includes employee salaries, rent, loans, tax bills, product material, marketing dollars, etc. Total this number and subtract it from your total inflow from Step 2 to get your cash flow figure.
4. Monitor, adjust, and update results: Keep a weekly or monthly running total of your cash flow to get a clear picture of your forecast over time. If you see a pattern of negative cash flows, you’ll need to reassess your spending and ensure you can keep your financial commitments. On the other hand, if you have a pattern of excess cash, you may want to plan for expansion.
   

Although cash flows can’t be 100% accurate (no one can truly know what the future holds), it is the simplest, most effective way to know if you’re on track for success.