What is a Cash Flow Forecast
Posted 11 January by Blaine Bertsch in Budget, Cash Flow, Entrepreneur, Small Business

The definition of a cash flow forecast often focuses on an older, more reactive model of financial forecasting. The traditional view of a cash flow forecast describes it as an “…estimate of the timing and amounts of cash inflows and outflows over a specific period (usually one year). A cash flow forecast shows if a firm needs to borrow, how much, when, and how it will repay the loan. Also called cash flow budget or cash flow projection.”

This definition, while adequate, describes the forecast as an occasional task, in this case a yearly activity. At Dryrun, we believe strongly in the power of cash flow forecasting to be a forward looking and proactive tool to, a living document that keeps your business out of trouble while simultaneously giving you the tools to assertively strategize and pursue growth opportunities…not just loans.

The difference stems from the use of the word forecast – to prepare a forecast connotes a static document prepared by experts, either ahead of use to procure funds, or afterward, perhaps for tax purposes. We often use the term in the present tense to describe an ongoing process. Forecasting is something that you sit down and chip away at every few days for a few minutes at a time.

Do I Need Cash Flow Forecasting?

Well, we’d argue that just about everyone in the world uses some kind of cash flow management – even if it’s as simple as “Can’t buy beer till payday”. For the purposes of our article however, personal cash flow management isn’t really our readership. Instead, we’re looking to those businesses who have grown or who are looking to grow beyond freelancer status and have suddenly found that the excel spreadsheet that took them through their start-up phase has scaled in complexity and length to become a nearly incomprehensible behemoth.

In short, they’ve discovered or have been advised that its time for a more dialed in approach. But which person in your organization is responsible for the actual creation and management of a cash flow solution?

You.

      The CEO should have a role if not the role in crafting a management strategy for cash ins and outs

Your core team members. Depending on how your team or partnership is constructed, there may be others who could play an important role contributing to your CFM goals.

• Your accountant is the perfect point of contact. We don’t know your business, your industry or your net worth, but we can tell you that your accountant would love to show you opportunities to save money throughout the year.

When is Cash Flow Management Used?

Every day and every way. We explained the value of regular visits to your cash flow management system earlier on the article. It’s valuable to find a system that works for you, but making regular time to input and analyze your cash flow allows you to tune into the pulse of your business. You’ll come away from the sessions with a clear and purposeful understanding of what’s going on, what the future could hold, and ready for opportunities that might present themselves.

In consultation with a number of business people and accountants over the years, we know that there’s a variety of ways to make cash flow management into a foundational habit.

      • Some CEOs make a point of visiting their CFM on the daily for ten minutes to plug in to their business

• Teams often meet on a weekly basis for a high level overview

• Salespeople might meet once or twice a quarter to review and set goals to put work in the pipeline

• Accountants see benefit in meeting monthly with their clients to perform gap analyses and look for strategic opportunities

In short, monthly is too seldom and reactive for something as important as cash flow. Find time weekly at a minimum, daily is even better.

Where Can I Find Cash Flow Management Tools?

The fear of cumbersome paper spreadsheets and charts seems to live on in our collective business unconscious and strikes fear in the heart of every entrepreneur and business owner. Honestly though, we can’t think of another reason why people are so resistant to tackle something so compelling and useful as cash flow.

Well, breathe a sigh of relief because the new technology of cloud tools makes cash flow management and financial modelling a snap. Take Dryrun (for a great example) – easy to set up and use, with collaborative options and integrations with Xero, QBO and Pipedrive available, multiple scenarios and forecasts to craft and a fully featured trial option, it’s a painless way to get started.

Looking for more structure than the most flexible tool on the market? There are other solid options, but ensure that you choose one that has the flexibility your business needs for such a key issue.

Why is Cash Flow Management Important?

Let’s go through some examples of why you might need to use more exact financial modelling/cash flow management:

Perhaps your business has both regularly occurring expenses such as rent, payroll, and utilities in addition to variable expenses like materials. On the accounts receivable side, invoices for completed projects or project milestones come in at different times and in different amounts. This is confusing and could easily lead to falling behind on necessary AP and AR if a financial management system isn’t put in place.

With a growing business and an array of moneys in and out that you thought you had a handle on, a mistake happens that puts you in overdraft or forces you to rely on your line of credit. Checking your bank balance, even daily, isn’t enough – in fact, it can be misleading. Perhaps business has flat-lined, with growth at a near stall, yet there are still bills to be paid. Knowing the timelines for various projects, payrolls and invoices is key.

Perhaps you’re looking for strategic business opportunities – the last one passed you by because you weren’t ready to enter a deal – cash flow management is how you look ahead and bolster your reserves so you’re ready to strike when the iron is hot.

Here’s hoping we’ve covered the basics relating to this week’s topic of cash flow management and convinced you to take a look at your own tactics and how cash flow management can really accelerate your growth. We’re looking forward to bringing more fundamental concepts to you with clear and easy explanations over the course of the year.

Did we miss something you’d like to know about? Leave us a comment or send us a quick note at hello@dryrun.com


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