Running a successful business relies on an accurate cash flow forecast. Often, entrepreneurs don't have a background in accounting or finance, and this skill needs to be learned. Luckily, making your own cash flow forecast isn't that difficult, and once you've figured it out, it will be one of the most useful tools you'll use to run your business.

Why is it important to make a cash flow plan?

Simply put, without money in the bank, you can't pay your bills. So a cash flow forecast is key to having a bird's eye view of your finances. Keeping track of your cash flow will let you know if and when you'll run out of money, so you can plan ahead. It might show you that you need to cut costs, find new ways to invest, or spend more time making sales. On the other hand, if your business is doing well, you might want to grow into new markets, invest in new goods, move to a bigger space, or hire more people. Having correct projections of your cash flow will help you figure out if you can afford to execute your plans and understand the timing involved. A cash flow forecast also keeps you honest and ensures you are making realistic plans for your company.

Four steps to creating a strong cash flow forecast 

1. Decide on your planning timelines

Cash flow planning can be done for as little as a few weeks or as long as several months ahead. Plan and predict with as much accuracy as possible. If you've been in business for a while, you may have a realistic sales pipeline and information available from earlier years. If you're just starting out, you might not have a lot of data, and so your forecast won't be as accurate. Don't stress out too much if you can't plan too far in advance. Over time, your cash flow will change, and this is normal. You can just change your plan as things change or as you get better figures.

2. Itemise your income

In your cash flow estimate, list your income for each week or month. Create a column for each week or month and a row for each type of income. Start by adding up all of your sales and putting them in the right week or month. Keep in mind that this is about when the money actually lands in your bank account. Also, don't forget to include all of your income that isn't directly from sales, like; tax payments, grants, shareholders' contributions, royalties etc. To find your net income, add up the totals in each box.

3. Write down everything you spend

Now that you know what is coming in, you need to figure out what is going out. Make a list of everything you'll spend on each week or month, like rent, salaries, raw materials, assets, loans, bank fees, marketing, tax etc. After you've included this information, add up the totals in each box to find your net spending.

4. Figure out your cash flow

For each week or month, take your net income and subtract your net spending. That will tell you whether you have a positive cash flow (more money coming in than going out) or a negative cash flow (more money going out than coming in). Then, on an ongoing basis, you can keep updating it to get an accurate picture of your cash flow forecast over time. Too many bad weeks could lead to trouble, so you'll need to plan ahead to make sure you can keep your promises, like paying your rent, loans, and salaries. A few good months could also mean that you have enough money to grow or spend more.

The bottom line

While creating and following a cash flow forecast is something that you may not know how to do, it is a simple skill to acquire and a very necessary management tool at that. So follow these simple steps, monitor it diligently and empower yourself with important knowledge about your business. To grow your business in the next 48 hours, contact Merchant Capital today.

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