Is it king in your organization? It should be. You should be forecasting your cash for the next thirty days, reviewing it daily, updating it weekly.
Some small business owners are unclear on the difference between “cash” and “profit.” They are totally different. You can be very profitable and still run out of cash. Likewise, you can be in a good cash position even if your financial statements are showing a loss. If you’re not clear on this, have your accountant explain it to you. But for purposes of this discussion, “cash” is the money you have immediately available . . . usually whatever you have in your checking account plus whatever you have in a bank line of credit. When you spend more money than you deposit, your cash goes down . . . you have negative cash flow and that’s bad. When you put more money into the bank than you are drawing out, you have positive cash flow and that’s good.
When you think of a cash flow forecast, think of your check book. Your check book is an historical record of what you deposited, what you spent, and what your balance was at any point in time. A cash flow forecast is the same thing except it’s predicting future deposits and withdrawals rather than recording past transactions.
So to start, you record your “opening balance” which is the cash you can access immediately as described above. Then you schedule the bills you expect to pay (including payroll, taxes, etc.) over the next thirty days and predict the receivables you will collect over the same period. Of course, your “opening balance” will go up and down during the course of the month as bills are paid and deposits are made. If you finish the month with a “closing balance” that is below your opening balance, then your cash flow for the month was negative. If your closing balance is higher, your cash flow for the month was positive.
The real value of this cash forecasting is that it allows you to closely manage your cash on a daily basis. If receivable collections don’t occur as predicted, you may elect to postpone paying some bills until the expected receivables arrive. Or if receivables arrive more quickly than expected, you may elect to accelerate some vendor payments. But most importantly, cash forecasting is an early warning system that alerts you if you are going to run out of cash and gives you time to arrange some bridge financing with your bank
Good cash management is essential to the financial health of a business. Worrying about running out of cash is one of the things that keeps small business owners awake at night. But there’s a cure for insomnia. Each day, look at how much cash you had to start the day, how much was deposited, how much was paid out, and how much cash you had at the end of the day. It can be a simple report that doesn’t take any time to generate or to read. Do it. You’ll sleep better.