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Cash flow is simply the money that flows into and out of a business. It is critical to have positive cash flow to pay for day-to-day operating expenses, pay employees, purchase inventory, and pay taxes.  

Why it is Critical to Forecast Cash Flow 

Running out of cash is something that no business wants to experience, yet it is one of the major reasons for business failures. Ensuring that a business will have the cash that it needs is the essence of the mission to forecast cash flow. A thorough and well-prepared cash flow forecast will provide clarity on where the business has been financially, where it is going, and provide insights on how to get there. It provides information that can build confidence among a business’s financial institutions, investors, owners, vendors, and employees. It provides the insights that enable a business to grow. And it helps provide the controls that can keep a business on track. 

What Can it Mean to Forecast Cash Flow? 

The outcomes of a good cash flow forecast include being able to wisely conserve and manage excess cash, plan for potential cash gaps to better avoid or deal with them, keep track of overdue payments, and track spending to ensure it is on target. To invest time and effort to forecast cash flow is to invest in good governance which is vital to a long and successful life for a business. 

How to Forecast Cashflow 

First, “cash” goes beyond currency. It includes assets that can be readily turned into physical cash, including bank account funds, marketable securities, and government bonds. 

To forecast cash flow means to predict a business’s money needs in advance of its needs. It includes these steps: 

First, determine how far out you can plan. That is, how far you feel you can predict cash flow accurately. Know that you can (and should) change your forecast along the way as changes take place and as you receive added information. 

Second, list and forecast all the cash and cash equivalents that have and will come into your business. That will include cash sales from operations, incoming royalties or license fees, grant income, tax refunds, interest income, and investments from owners or shareholders. Also, include any new loans and any sales of assets. 

Third, list and forecast all the cash that has and will flow out of your business. That will include salaries, rent, the cost of raw materials, payments on assets that have been purchased, payments on bank loans including fees, marketing, and advertising expenditures, and taxes paid. 

Fourth, keep running totals of cash coming in and out to understand your cash flow picture. Develop a projection using trends to know where gaps and challenges may exist. 

Fifth, look ahead to see if there will be new sources of cash and if there will be new expenses or draws on cash that needs to be considered.

Keys to Forecast Cashflow Accurately 

It is important to have solid processes in place to achieve accurate cash flow forecasting. Those include: 

  • Making sure not to confuse cash flow with revenue. 
  • Establishing clear communication protocols within a business. 
  • Accurately identifying and recording all cash inflows and outflows. 
  • Using your forecasting process to examine alternative scenarios. 
  • Monitoring and adjusting the forecasting results. 

Get Expert Accounting and Financial Assistance  

Contact Doerhoff & Associates, CPA, based in Jefferson City, MO for professional accounting and financial assistance that you can count on. Doerhoff & Associates has one goal in mind, to provide comprehensive business accounting services designed specifically for your success.