Creating effective cash flow projections is important for every business.
The frequency depends on the stage of your company: stable and steady, monthly is fine; high growth, crisis, or contracting, weekly is imperative.
The layout in its simplest form is: Beginning Cash Balance + Cash Receipts (In) – Cash Disbursements (Out) = Ending Cash Balance.
To have a valuable tool, follow these five steps:
Reconcile Bank Account
It is important to start with a reconciled checkbook balance. Caution do not just check on line and start with the amount stated in the bank account. There may be outstanding checks and other charges.
Reconciling the company’s bank account monthly is critical for many reasons: control, accuracy, impact on decisions, and affects the cash flow forecast.
Create a profit and loss forecast
Forecast revenue, variable costs (costs incurred only if there is a sale) and fixed costs (costs incurred whether you have a sale or not) for the next six months.
Fixed costs include: indirect costs (field supervision, vehicles, insurance); sales, general and administrative costs (office payroll, rent, utilities, marketing, benefits, and taxes).
Take the previous six months of operating results to validate the projected monthly operating costs.
The next step is to determine the actual timing of sales, variable and fixed costs on the cash forecast.
A sales made, does not mean cash received. Determine the timing of when you will be paid for the product or service sold.
If 30 day terms are offered, project receiving the cash in the month after the sale is made. Example: sale made in October; cash received in November.
The main variable costs are direct labor and materials. Labor may be paid weekly or bi-weekly; while you may have 30 – 45 day payment terms with major suppliers and vendors. Fixed costs are usually paid out in the current month.
Factor these timeframes into the forecast.
Identify other cash items
Capital expenditures, prepaid expenses (insurance, annual maintenance agreements), loan payments, taxes and other balance sheet items must be identified and factored into the analysis.
Example: Based on age of equipment and forecasted revenue; a new piece of equipment will be purchased. The cash out will not be reflected in the expenses of the company, but must be accounted for on the cash flow forecast.
After you have put all the pieces together; take a step back and ask a few simple questions: Do these projections make sense? Am I comfortable with my sales forecast? Do the actions within the company support the expected results? If changes are needed to achieve these results, have they been made?
Do you need assistance in creating a cash forecast? Call us for a free consultation to discuss how we may assist you.