Cash Flow Forecasting
That Really Works

Discover the true secret of cash flow forecasting and grow your company confidently without jeopardizing precious cash flow. Learn how to prepare and apply cash flow forecasts using proven principles and methods.

Proper cash flow forecasting is essential to the running of a successful business. Poor cash flow management leads to financial trouble. Fortunately, cash flow projections are easily prepared - when you know how. It comes down to two basic choices:

• WINNING the cash flow game with proper forecasting
• LOSING big in real-life cash flow with bad forecasting

WINNING At Cash Flow Forecasting

Following is a typical cash flow forecast template for a small business (annual sales of $12,000,000). This particular one was done on a monthly basis, but small changes in the program can produce quarterly or yearly forecasts. Copy the table below or call for help in setting up a customized spreadsheet to help your company win the cash flow game.

Assumptions:

1. Cash receipts from sales occur as follows:
   • 25% in 1st month after billing
   • 50% in 2nd month after billing
   • 25% in 3rd month after billing
2. Other cash receipts are non-sales collected in the same month.
3. Direct costs are 0.912 of sales and disbursed 25% in the month incurred and 75% in the month following.
4. Indirect and other costs and disbursed in the month incurred.
5. Cash receipts and disbursements for September and October are actual values.
6. Cash receipts and disbursements for November are best guesses.

LOSING the Cash Flow Game

There are three levels of forecasting, taking you from losing to winning the game.

1. Based only on Billings (Crisis Management) - Cash flow forecasts based only on billings do nothing more than lead management from one crisis to the next. This is really losing the cash flow game. As bad as it is, some company accountants like this simple billings-only forecast because they can work with actual figures and not have to make any real projections or estimates.

2. Based only on Billings and Bookings (Better, But Not Good Enough) - The example forecast above is based on both billings and booked orders, business in hand in other words. This forecast is still almost useless because it doesn't take sales projections into account. On the bright side, it is much better than a forecast based only on billings, so it DOES represent a positive step toward winning the cash flow game.

3. Based on Billings, Bookings and Sales Projections (Real Cash Management) - Winning at cash flow requires that one take projected sales into account in the forecast. This is extremely important because it allows management to assess the effect on cash flow of various sales scenarios. It is a common mistake for many executives to believe that greater sales will affect cash flow positively. Usually the reverse is true.

The forecast is just one management tool in the cash flow game. See our Profit Sensitivity Analysis for another one that is especially useful at times when businesses are worried about declining profits.

Return from this cash flow forecasting page
to the cash flow management page.