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Cash Flow Forecasting - An Overview
Cash flow forecasting is about predicting a company’s cash balance in advance, including the low cash point, so that business managers can know as far in advance as possible if or when a cash flow problem might come.

Even profitable businesses with dedicated employees and products or services loved by customers can run out of cash. Sometimes it’s as simple as a couple of top customers not being able to pay their bills on time.

Businesses often go out of business because they run out of cash without having enough time to prepare for it.

● If I were to tell a business owner that the company is going to run out of cash and won’t have enough money to make payroll in 10 to 12 weeks, in many circumstances, the owner would be able to come up with at least a temporary solution to extend the life of the company.

● If I were to tell that same business owner only two weeks ahead of time, most likely the company would be doomed.

Cash flow forecasting is about providing visibility about a company’s cash position to the business owner/manager with as much advance notice as possible.

There are two types of cash flow forecasting recommended for any business that is less than flush with cash:

1. Short-Term Cash Flow Forecasting — This process specifically lists every major cash inflow and outflow that is expected to happen by a certain point in time. Usually that point in time is either the end of the week or the next payroll date. The purpose is to forecast as accurately as possible how much cash the company will have on the date the next payroll needs to be funded, thereby providing a scenario analysis opportunity to say “Let’s not pay these bills until after that payroll” or “We better make sure these two payments are coming in before payroll, because we need them, so let’s contact those customers and ask for an update.”

2. Multi-Week Cash Flow Forecasting — Also known as a Weekly Cash Flow Forecast or 13-Week Cash Flow Forecast (or as I refer to it, “The best business management tool ever invented”), this is a spreadsheet featuring weeks as columns and is designed to track expectations for all inflows and outflows of cash weekly. The goal is to calculate expected cash balances at the end of each week for many weeks to come.

At our online playbook, we provide video training on how to create and maintain both of these cash flow forecasts, including the same cash flow forecast models we use with our clients. It wouldn’t be feasible to translate the video guidance and the on-screen development of the Excel models into text here. However, the importance of cash flow forecasting is critical for most small businesses. Our consulting team has seen dozens of businesses saved by implementing cash flow forecasting into their weekly routines.

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