Every business needs a cash flow forecast. Cash flow is what drives operations–it’s needed for payroll and operating expenses, it’s needed to distribute profits to investors and owners, and it’s needed to invest in business growth. Cash flow forecasts are a measure of cash in minus cash out, and they help businesses strategically plan the amount of cash they have in their bank accounts available for future operations and expenditures.
A cash flow forecast may show an upcoming cash shortfall, which helps a business owner plan to pull $50,000 from a line of credit, or to slow expenditures over that time frame. Alternatively, it could show a very strong quarter coming up, which could be a good time to purchase a piece of equipment. Or it could show if there’s enough cash to hire an additional employee in the next year.
A cash flow forecast is needed in addition to a profit and loss statement because a P&L doesn’t show actual cash levels. A company may have a profitable month shown on the P&L, yet have no cash in the bank. This is partly because a P&L doesn’t take every cash outflow on the balance sheet into account. For example, capital expenditures (such as buying a new company car) are not going to show up on a profit and loss, but the money still comes out of the business account. Additionally, without a cash flow forecast, companies that run their books on accrual are not always going to have an accurate understanding of the cash position. Accrual basis accounting recognizes revenues when earned and expenses when incurred, not when cash is actually received or paid. In reality, a company may pay bills later than the month they are incurred, and a company may not collect on invoices immediately. Therefore, a cash flow forecast is necessary for a live perspective of current and future cash flow levels.
A cash flow forecast is very important if a company needs to purchase and store inventory, or if it needs to purchase materials or equipment for projects. It helps companies manage these upfront costs and maintain business operations while waiting for revenue from project milestones or from selling products.
A cash flow forecast helps business owners understand the timeline of their investments. Every investment should have a return, but it’s not immediate. If a business wants to make an investment (employees, equipment, or inventory), a cash flow forecast is vital to understand if there’s enough cash to cover the period when the investment is not yet productive. And it becomes even more critical when a company is making multiple investments at once. A cash flow forecast acts as an operational roadmap to guide every company, from the small business that’s just looking to pay their one or two employees, all the way to the large company that’s making 15 different investments with various ROIs and timelines.
A cash flow forecast also helps owners plan when they can pull money out of their business. Slower months or investments may restrict an owner’s ability to pull cash out in the short term, but the forecast will show when future cash levels will be sufficient for the business owner to withdraw money.
At Sentinel Finance Group, we create clear and informative cash flow forecasts that help business owners make strategic decisions. We prepare the forecast on a weekly or monthly basis as needed, and we meet with business owners to help them understand the information. We also know that a cash flow forecast is only as accurate as the data going in, so we work with our clients to ensure they have consistent operational processes, data, and reporting coming from their other departments.
Sentinel Finance Group is an outsourced CFO firm in Kansas City and provides fractional CFO services and controller services to local businesses.
