Smart Decisions To Forecast Your Cash Flow


So, as an entrepreneur, what’s important for our business? Well, certainly profit. But you should also consider the importance of cash flow. Even a profitable company can’t operate for long without sufficient cash inflows.

Your need those inflows to operate your business each month. In fact, many profitable companies struggle if their cash flow is poor. That’s because revenue does not equal cash in the door. If you have receivables- and you can’t collect on those receivables fast enough- you may need to raise more cash to operate.

Raising cash has a downside. If your borrow funds, you’ll have to make interest payments and plan to repay the principal. Interest is another expense you’ll have to incur. If, on the other hand, you raise money by selling ownership in your business, you’ll give up some control over your company.

Take a hard look at your cash needs so you can plan your business operations.

Creating a cash flow forecast

Smart Decisions To Forecast Cash Flow


To avoid the need to borrow money or sell equity in your business, do your best to create a cash flow projection. The terms “projection” and “forecasting” are both used by accountants. For this discussion, let’s say that you’re creating a projection to forecast your cash flow.

Fortunately, many accounting software programs allow you to build a cash flow projection using the software. Whether you build a projection in excel or using accounting software, the process is critically important. Here are some reasons why:

  • Can you make it on the cash you have? Your cash flow projection computes whether or not your assumptions allow you to generate a positive cash balance every month. If not, you’ll have to take some corrective action.
  • Are your receivable balances too old? If you grow your sales every month, your collections should also increase. If your rate of collections is less than your sales growth, you may need to take action to collect your receivables faster.
  • How are you managing your payables? Your need to manage when bills are paid. You need to maintain a good relationship with your vendors, but you also need to conserve cash. Projecting your cash flow helps you analyze how quickly you should pay your bills.

Creating a cash flow projection helps you address each of these questions.

Cash forecast example

This post includes a template to project your cash flow. Say, for example, that you own Old Navy and you sell jeans in your retail stores. The template makes these assumptions:

  • Beginning and ending balances: You’ll note that the ending cash balance in July ($245,000) is the beginning balance in August.
  • Receivables: You’ll notice that each month includes a new receivable balance. That’s because this spreadsheet tracks “Sales On Account”. To keep it simple, this example assumes all sales generate a receivable balance. July, for example, assumes $300,000 in sales. 80% of receivables are collected in the month following the sale. So, 80% of the $300,000 in July sales ($240,000) is collected in August. The remaining 20% of July sales ($60,000) is collected in September. Note, also, the some June sales are collected in July and August. You can make your own assumptions about how quickly you’ll collect your receivables.
  • Inventory payments: Your template can include other large payments that you need to plan. For example, this schedule includes spending for inventory. The monthly cash outflow for inventory spending is 65% of July budgeted sales. Using the same cash outflow for inventory spending each month is explained below.

As you can see, all of these components factor into your ending balance of cash each month.

Connecting your inventory projections

The right hand side of the spreadsheet explains the cost of sales and units sold for July. Sales total $300,000 for July and the cost of sales is 65% of sales ($195,000). Each unit has a cost of $10, so the number of units sold is ($195,000 cost of sales) / ($10 cost per unit), or 19,500 units.

At the bottom of the spreadsheet, you’ll see a projection of inventory stated in units. In July, Old Navy purchases 19,500 units (pairs of jeans) and sells the entire 19,500 purchase amount. There is no ending inventory for July, which means that August does not have a beginning inventory balance.

Required inventory

Smart Decisions To Forecast Cash Flow


Every business needs to fill orders received in the first few day of the month. To fill those orders, a company needs to start each month with a beginning inventory balance. When Old Navy opens the doors on August 1st, they do not have any inventory to sell on that day. If they can’t fill an order, they may lose some potential sales.

When businesses plan purchases, they normally plan for enough units to meet their projected sales for the month, plus a level of ending inventory. Assume that Old Navy projects sales for through end of the year. Based on the projection, Old Navy decides that monthly purchases of 19,500 units should cover sales and generate some ending inventory each month.

August ending inventory

Now, take a look at August. Sales total $270,000. Cost of sales is 65%, or $175,500. You’ll note that Old Navy has a cash outflow of $195,000 for inventory. Again, the intention here is to produce enough units to generate some ending inventory each month.

At the bottom of the spreadsheet, you see that purchases in units total 19,500. Cost of sales in units is 17,550, which results in ending inventory of (19,500 – 17,550), or 1,950 units. August ending inventory is also September’s beginning inventory.

September production

Sales for September total $310,000. Cost of sales is $201,500 (65% of sales). Just as in August, Old Navy spends $195,000 on inventory purchases. In this case, cost of sales is slightly more than the amount of inventory purchased.

Old Navy’s goal was to come up with a monthly inventory purchase amount that would generate an ending inventory balance, based on an average month’s sales. Some months will have higher sales, and some lower.

Take a look at the inventory activity at the bottom of the spreadsheet. Beginning inventory for September is 1,950 units and Old Navy purchases 19,500 units. The total of 21,450 is the jeans available for sale.

Two things can happen with your available for sale balance. The jeans are either sold, or they remain in ending inventory. In September, cost of sales is 20,150 units, which leaves 1,300 units in ending inventory. Stated in dollars, ending inventory is ($10 X 1,300 units), or $13,000.

Taking action to improve cash flow

After projecting your cash inflows and outflows, you may decide that your ending cash balance in a particular month (or for several months) is too low. You’re concerned that you won’t have enough cash to operate.

If you need to increase your rate of cash collections, here are some steps you can take:

  • Faster collections: Create a procedure to email and call customers when invoices have not been paid within 30 days. If you take action on old invoices sooner, you can collect cash faster.
  • Insist on cash: Ask customers for a cash deposit when they place an order. That policy will increase your cash flow, and help cover the cost of that customer’s order.
  • Offer discounts: Offer a discount, if a customer pays their invoice within 10 days of receiving your product or service. Say, for example, that you offer a 10% discount to a customer who normally pays in 30 days. You decide that it’s more important to get 90% of the bill paid in 10 days. You’re willing to give up 10% of the revenue to get paid 20 days sooner.

Cash management is just as important as your company profit. Take the time to put together a cash projection for the year. If you determine that your cash balance won’t be high enough, take steps to improve your cash collections.

Projecting your cash flow can give you some peace of mind.

Smart Decisions To Forecast Cash Flow


About Author

Ken Boyd

Ken Boyd is the Author of 4 Dummies books on Accounting, including Cost Accounting for Dummies. He blogs and produces video content at