4 Ways to Create an Accurate Cash Forecast

Nicole Dwyer
How to Create an Accurate Cash Forecast

How to Create an Accurate Cash Forecast

All businesses need cash to keep their doors open. When money is tight, simply covering recurring operating expenses can become difficult enough on its own.

Are you able to meet your financial responsibilities while achieving your business goals?

If you’re not sure of the answer to this question, it’s time to create a cash flow forecast to get a better idea of where your finances will stand over the foreseeable future.

How exactly do you create a cash forecast?

Step 1: Decide How Far in Advance You Want to Forecast

The first thing you need to do when creating a cash flow forecast is determine how far out in advance you want to project your finances.

Because nobody can predict the future, it doesn’t make a lot of sense to forecast your cash flow projections out for the next several years.

But depending on the size of your business and the industry you operate in, it may make sense to forecast your cash flow for the next 90 or 120 days—or even the next 12 months. Forecasts that extend beyond 12 months may not be as accurate as you’d hope.

Step 2: Determine Your Projected Cash Inflows

Once you know how far out you’d like to forecast, it’s time to project how much cash will come your way over that period.

For example, if you’re projecting cash flow over the next four months, reference your previous sales history to see the amount you brought in during each particular month over the last several years. Of course, your sales for the month of May won’t be exactly the same every year, but if you analyze your sales and see that you earned the most in May for the last five years, it’s a good guess that you’ll do the same this year.

Once you’ve done that, compare those sales history numbers with your sales projections for the upcoming year to see how everything lines up. Make your best guess as to how much money you think you’ll actually collect during the periods you’re measuring—taking early payment discounts, net terms, and late payment penalties into consideration, too.

Keep in mind that receivables are not the same thing as cash. While invoices might look nice on your balance sheet, you can’t actually spend those assets until payment arrives. To create an accurate cash forecast, you’ll need to consider your days sales outstanding figures, too.

Step 3: Determine Your Projected Cash Outflow

Now that you have a good guess about how much money you’ll be bringing in, it’s time to determine how much money you’ll be spending over the forecasted period.

Some of these cash outflows will be relatively easy to forecast—like rent, utilities, salaries, tax payments, and other recurring expenses, like software subscriptions. Other unforeseen expenses will invariably pop up, too. These are much harder to project. But if you take a look at your expenses over the last several years, you should get some idea of how many unbudgeted expenses you might incur over the forecasted period.

Don’t forget to pay attention to your inventory expenditures, either. While inventory lives as an asset on your balance sheet, it can put a big dent in your cash flow—especially during slower sales periods.

Step 4: Add It All Up

At this point, you’ve got a pretty good idea of how much money you’ll bring in over the forecasted period, as well as how much money you’ll be sending out. Combine the numbers and add them to your bank balance to project your cash flow.

As time goes on, determine how your projections measured up to your actual cash situation. For the best results, continue refining your cash flow forecasts over time. It may take a bit of time, but you’ll have a much better picture of your company’s financial health—which should help you avoid costly mistakes.

To save time on cash flow forecasting, use an automated system like YayPay to take care of the heavy lifting for you. With YayPay, you can easily determine your cash inflows and clearly see when (and which of) your customers are most likely to pay you.

Cash flow forecasting can help your business avoid cash flow problems and know with certainty when the time is right to pursue the next big opportunity. The faster you begin forecasting your cash flow, the sooner you’ll have more control over your company’s financial destiny.

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