A cash flow forecast (also called projection) helps you prepare financially for the future. It shows how much money you expect to receive or spend at specific points in time, such as during the next month, quarter or year. A cash flow forecast also shows whether you’ll have enough money to run your business and meet your financial obligation. This includes payments on your business’s outstanding loans and paying employees’ salaries.
1) Why Do I Need a Cash Flow Forecast?
A cash flow forecast is one of your most valuable planning tools. You’ve conducted thorough market research, created an outline for your business plan, and estimated start-up costs. Now it’s time to look forward. What will happen in three months? Six months? One year? A forecast helps you answer these questions by projecting income (and sometimes expenses) for different time periods.
2) What Does It Look Like?
A cash flow forecast consists of two components: actual income from sales, and expenses. In addition, if you have loans that require payments, you’ll want to include them in your plan as well. By evaluating both income and expense on a monthly basis, you can build a realistic picture of where your business stands financially.
3) How Often Should I Create One?
A cash flow statement shows you where your business is making or losing money. It helps you predict whether or not your business will have enough cash for upcoming expenses and helps ensure that your business stays solvent.
The result of a well-prepared forecast can be a better understanding of what’s happening now in your company. Not to mention a more solid idea of where it’s headed next. In other words, effective financial forecasting has value beyond simply providing accurate numbers.
Businesses should as a minimum be creating cash flow forecasts annually, but here at Savvy we have a constant moving cash flow forecast. Every day, we record actual income and actual expenditure to automatically change the projected cash flow for the coming days and months. Making it a working document means it really is useful to the management of your business.
4) How do I use this?
Cash flow forecasts can be useful for monitoring your business’s financial health. If, for example, you find yourself losing track of your business’s finances, or if you’re worried about taking on debt, take a look at your cash flow forecast.
If it shows that you may not have enough money in three months, consider cutting back on expenditures. You can also seek additional funding from investors or take out a small loan.
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