How to Create a Monthly Cash Flow Forecast for Your Business

Introduction

Monthly cash flow forecasts provide businesses with a way to identify and anticipate future financial needs. With a detailed understanding of the cash flow cycle, companies can determine when and how much capital to access, in order to keep operations running smoothly. In this article, we will discuss the importance of creating a monthly cash flow forecast and how to do it.

Preparing to Create a Monthly Cash Flow Forecast

Creating a monthly cash flow forecast for your business is an essential part of the budgeting process. It is important to consider all income, expenses and budget cycles when creating your forecast so you have a comprehensive view of your finances. Here are a few steps to get you started.

Identifying Your Budget Cycle

The first step in creating your monthly cash flow forecast is to identify your budget cycle. Depending on your industry and company structure, your budget cycle may be monthly or quarterly. It is important to be aware of your budget cycle when creating your forecast so that you can properly allocate your resources.

Estimating the Average Amount of Income, Exclusion Items and Expenses for Your Business

Once you have identified your budget cycle, the next step is to estimate the average amount of income, exclusion items and expenses for your business. This includes income from customers, investments and other resources, as well as expenses related to payroll, overhead costs and miscellaneous items. These figures will give you a starting point when crafting your forecast.

Allocating the Budget for Each Expense, Income and Exclusion Item

The last step in creating a monthly cash flow forecast is to allocate the budget for each expense, income and exclusion item. This will give you an accurate picture of your finances and help you plan accordingly. It is important to consider your budget cycle when allocating funds, as this will help you properly manage your resources.

Following these steps will help you create a comprehensive and accurate monthly cash flow forecast for your business. Knowing the average amount of income, exclusion items and expenses that you have coming in and going out each month will help you manage your finances more effectively.

Step-by-step Tips for Building Your Monthly Cash Flow Forecast

Having an accurate, up-to-date cash flow forecast is essential for the successful management of any business. While creating the forecast may seem daunting and time-consuming, arming yourself with the necessary information and following a step-by-step approach can help you create a monthly cash flow forecast that is accurate and effective.

Start with Your Income and Exclusion Items and Add Up the Total for Each Month

Your income and exclusion items are the foundation of your cash flow forecast. These typically include earnings from any sales or services your business provides, as well as the value of investments or loans the business has acquired. Start by calculating the total value of your income and exclusion items for each month of the forecast period.

Calculate Your Monthly Expenses

Once you’ve determined the total value of your income and exclusion items, it’s time to move on to your expenses. Monthly expenses typically include, but are not limited to, rent, utilities, employee wages, taxes, and any other costs associated with running the business. Be sure to take into account any fluctuating expenses, such as variable utilities costs. These should be estimated based on past averages.

Take Away Your Total Expenses From Your Total Income and Exclusion Items to Arrive at Your Net Cash Balance

Once you’ve calculated your total income and exclusion items and your total expenses for the month, take away your total expenses from your total income and exclusion items to arrive at your net cash balance for that month. This number represents the amount of money your business has available to work with for the month.

Repeat This Process Over the Next 12 Months to Create a 12-Month Forecast

To create a 12-month forecast, simply repeat the process outlined above for each month. Do be aware, however, that the fluctuating nature of business income and expenses often means that forecasting the cash balance for each month can be difficult. Pay attention to any trends of increasing or decreasing performance and use that information to more accurately predict the net cash balance for each month.

4. Additional Strategies to Consider

Creating a transparent and detailed cash flow forecast for your business is an important step in keeping your business operations running smoothly. Here, we will look at some of the additional strategies that you can use when working on your monthly cash flow forecast.

a. Use historical data when available

Where possible, it is beneficial to factor in any historical data that is applicable. This could include customer billing data, customer payment data, or any other data and trends that have previously been observed in your business. This data can be used to create more informed and accurate forecasts.

b. Be aware of seasonal changes

Be sure to factor in any seasonal changes to your business operations. This could include changes to customer demand and customer spending, any changes to the products you are offering, or any other seasonal factors that are relevant for your business. By taking these into account, you will be better able to plan and prepare for any changes ahead of time.

c. Factor in any planned changes to your business

If you have any plans in place to make any changes to your business in the near future, be sure to factor these into your cash flow forecast. This could include any new products or services that you plan to launch, any expansion plans, or any changes to your current business model. By taking these into account, you will be better prepared and be able to make any necessary adjustments in time.

How to Use Your Monthly Cash Flow Forecast

Using your monthly cash flow forecast is an essential step in understanding the expected financial performance of your business. This forecast will allow you to anticipate cash flow shortages and identify potential opportunities to boost income. Here are a few ideas on how to use your cash flow forecast.

Evaluate the Accuracy of Your Forecast

Once you create your monthly cash flow forecast, it's important to evaluate its accuracy. Compare your forecast with actual financial performance to ensure the accuracy of your assumptions and outlook. Any discrepancies should be identified and adjusted to stay on top of future cash flows.

Generate Forecasts at Different Intervals to Assess the Impact of Changes

Generating forecasts at different intervals is another way to use your cash flow forecast. For example, you can create monthly, quarterly and annual forecasts to get a picture of expected cash flows over the long-term. This can help you assess the impact of changes and plan accordingly.

Identify Potential Cash Flow Shortages or Surplus

Finally, you can use your monthly cash flow forecast to identify potential cash flow shortages or surplus. By noting any unusually large or small cash flows, you can determine if there is a need for additional financing or a potential for increased profits. This will help you stay on top of your business’s finances and make the necessary adjustments.

Your monthly cash flow forecast is an invaluable tool for understanding your business’s expected financial performance. By evaluating the accuracy of your forecast, generating forecasts at different intervals and identifying potential cash flow shortages or surplus, you’ll have the information needed to make sound financial decisions and ensure success.

Additional Cash Flow Forecast Resources

Creating a cash flow forecast can be a daunting task, and sometimes help from a professional may be necessary. There are many resources available to help make this process easier, including online financial tools and templates, professional financial consultants, and CPAs.

Online Financial Tools and Templates

Online financial tools and templates can be a great resource for small business owners. Many websites offer customizable templates that can be used to create a basic cash flow forecast. Additionally, some websites offer sophisticated financial planning tools that are linked to an organization’s financial documents. This makes creating a forecast much simpler and more accurate.

Professional Financial Consultants and CPAs

Professionals such as financial consultants and CPAs can provide invaluable assistance when creating a cash flow forecast. These experts are knowledgeable in all areas of accounting, including cash flow. Professional advice can be especially helpful for more complex forecasts. Financial consultants and CPAs will not only be able to help create a comprehensive forecast, but also provide additional insight into business finances.

Organizations of all sizes should consider investing in professional help when creating a cash flow forecast. Professional financial advice can help ensure a better understanding of how an organization’s finances work and offer valuable insight into potential areas for improvement. For those with limited experience in accounting, the help of a financial consultant or CPA can be the key to creating a clear and accurate forecast.

Conclusion

Creating a monthly cash flow forecast is an essential step in setting your business up for success. Not only does it provide an up-to-date look at your business’s financials, it also offers invaluable insight as to which areas of your budget require attention or adjustment. Knowing your cash flow position on a regular basis will help you stay proactive and innovative when it comes to controlling your business’s costs and generating new revenue.

The ability to craft a reliable and effective monthly cash flow forecast requires an in-depth understanding of your industry, your target audience and the market in general. To give your cash flow forecast the best chance at success, be sure to examine your industry, consider the competition and keep a close eye on consumer behavior.

If you need additional guidance or advice on how to create a monthly cash flow forecast for your business, you can consult a financial advisor, an accountant or even your bank. Learning the ins and outs of a cash flow forecast can be challenging, but it is an invaluable exercise that remains essential to the success of your business.