Making and Using a Cash Flow Forecast | Tory Burch Foundation

Many early-stage business owners use revenue as the main measure of their business’ health.  However, a company can have high revenue and still go out of business because of cash flow issues. Cash flow is the total amount of money moving in and out of a business, whereas revenue is only the money coming into a business as a result of sales or services provided. It’s easy for a company with a high revenue to have its cash flow represented by a negative number because that revenue isn’t enough or isn’t coming in on a schedule that allows the business to meet all its obligations to vendors, employees and more. In fact, 82% of businesses fail because of cash flow problems. 

Clara CFO Group founder Hannah Smolinski joined our webinar series for a session on cash flow forecasting, helping our community plan for building sustainable businesses.

How do I know if my business has a cash flow problem? 

While all business owners should understand the way money moves in and out of their companies, Smolinski listed some signs that your cash flow needs your immediate attention: 

• You obsess over your bank balance. Again, founders should have a general idea of how much cash they have in their bank account, but looking constantly means there’s concern you won’t be able to cover a cost. 
• You have no business savings. Setting aside money is crucial to helping your business stay strong. Most financial advisors recommend having at least one to three months’ operating expenses set aside.
• You’re not able to pay bills on time. Things happen, of course, but maintaining a strong business credit rating will help you grow your business later down the line.
• You use debt for normal operations. Make it a habit to use revenue for your standard operating costs. 
• You have high accounts receivable, meaning you’ve sent clients their invoices but they haven’t paid them. Managing those payments and accounting for them properly is a big part of cash flow management. 

What is cash flow forecasting?

Smolinski stressed that a cash flow forecast is different from a budget. Businesses typically make budgets once a year to allocate money for specific costs, whereas cash-flow forecasts let you move money around according to the present or anticipated reality of your business. Your forecast will measure your cash inflows against your cash outflows. Those are generally divided as:

• Cash inflows: Revenue will account for most of your cash inflows. Your inflow can also include lines of credit, outside investment (e.g. money raised through crowdfunding or friends and family). An owner using their own, separate, money to support the business should be counted as inflow as well.
• Cash outflows: Regular operating expenses (e.g. payroll, rent, software), debt repayments, capital expenditures (e.g. equipment, cars and fixtures), money saved for reserves or investments. Your taxes and owner’s draw are also part of your cash outflows. It’s especially important to account for these two items in your forecast, since they’re not included in your profit and loss statement. 

Smolinski stressed that a cash flow forecast is a management tool, rather than a financial statement. “We try to just kind of do more high level forecasting, because, remember…you’re trying to get directionally correct.” She went on, “If your forecast is correct, down to the penny, or down to the dollar, in five, six or 12 months from now, you probably just got really lucky.” She recommends business owners review their cash flow forecasts on a weekly, biweekly or monthly basis. 

This is a management tool. It’s not a financial statement.

Getting started.

Gather your documents to start your own cash-flow forecasting. You will need:

• 12 months of income statements from your accounting system (e.g. Freshbooks). Start with the previous 6 months of statements if your business is very new 
• Your budget, if you have one 
• Your balance sheet, which you can also pull from your accounting system
• A cash flow spreadsheet. Smolinski’s company offers this one, but you can find free templates that speak to your industry online. 

Whichever one you choose, your cash flow template will have labeled lines for sources of the company’s cash inflow and outflow. But remember, you may have to bucket expenses into larger groups. For example, the office expenses line may include meals and office supplies. If your business has a lot of variable costs, see if there’s a formula for those costs (e.g. credit card issuers charge merchants about 3% for each transaction) or see what other aspect of your business affects that variability. Another important thing to note is that your accounts receivable don’t factor into your cash-flow forecast until your client pays (they’re no longer classified as accounts receivable upon payment). 

You may be able to account for these by changing your pricing structure. To see the spreadsheet in action, see Smolinski’s live demo from the webinar. 

Tips to manage and improve your cash flow. 

A cash flow spreadsheet lets you see at a glance what happens if you change the money moving in and out of your business. It’s a great tool for “what-if” scenarios outside of your regular operations. Thinking about attending a conference? Change the amount on the line indicated for that category of cash outflow and see how it impacts your estimated balance.

The cash flow forecast takes staffing into account, and it’s probably your biggest expense. Eliminating a role at your company may seem like the best cost-saving approach, but rehiring and retraining a new employee when your company’s finances change again can cost you up to 50% of that person’s annual salary. Smolinski urges business owners to be careful when accounting for the people represented by a line on the spreadsheet. “Definitely think through that decision before you just cut employees left and right, just from a human perspective, but also from a financial perspective,” she explained. 

Using a cash flow forecast as a management tool is especially useful for businesses that see marked high and low periods at the same points in the year. Smolinski used ecommerce businesses that make up to 60% of their revenue in the final quarter of the year as an example. “It’s really important for us to make sure that that is put into the model, so that we understand that the profits from…Q4 need to be able to sustain for a few months until we can kind of get the sales back up.” Seasonal or client-based businesses will have to plan for leaner operations when the demand is low. Those companies may also need to focus on drumming up business that will generate revenue during leaner times.  

Service-based businesses often have cash flow problems because of late client payments. Some options for getting money in your accounts faster include enforcing late fees, offering early pay discounts and accepting credit cards for services. You may also find that it’s more sustainable to move from a project-based to a retainer-based model.

Solopreneurs or founders in the very early stages will likely need to manage their cash-flow worksheet on their own. Once you have the resources, it’s a good idea to outsource this service to your financial partners. Ask an accountant or bookkeeper if they regularly provide this service to clients, as those experts more often look at historical data. Ideally, it helps you have someone with operational and industry knowledge to help you make decisions according to the forecast, like a director of operations or a fractional CFO.