A cash flow forecast is a financial road map, which attempts to predict all the cash movements in and out of your bank account over a set period of time. It is key to business sustainability and success.
Why? Many good businesses can be profitable, but may still run out of money if they, for instance, buy big pieces of plant and equipment or have large loan repayments.
So, if your business has $5,000 in the bank and you want to end the year with a cash flow of $50,000, the only reliable way to achieve this is to plan.
It’s important to note, however, that cash flow forecasts, despite best intentions, will almost certainly turn out wrong every year in some way. I’d bet that no business person ever has got to the end of the year, compared actual results to their forecast, and given themselves a big pat on the back while thinking ‘well done, a perfect match!’
The fact is that life happens while we’re working, and things change that affect cash flow. So forget about perfection and remember that the process of planning is far more important than the plan itself.
Or as former US president, Dwight Eisenhower, said: “In preparing for battle I have always found that plans are useless, but planning is indispensable.”
In other words, planning forces you through a healthy thought process.
So how do you prepare a cash flow forecast? It’s all about asking yourself a series of questions.