How To Write a Cash-Flow Forecast That Works For You and Not Your Bank

A cash-flow forecast helps you predict what you’ll make for the year. As a business owner, you may have noticed that banks want a complicated spreadsheet that accounts for all variables imaginable. Sometimes, this forces the cash-flow forecast to become meaningless and impractical. What you really need is a simple way to track all of the money you make and spend.

Keep It Simple

There is a seemingly endless number of accounting programs on the market. All of these programs promise to make your life easier. However, what they usually do is create additional work. Customized programs have their own proprietary format, and system rules, that sometimes prevent you from creating a cash-flow analysis and forecast that you can use day-to-day.

Unless you’re a large corporation, with multiple departments and sub-divisions, you can use two simple columns to make accurate and meaningful cash-flow forecasts.

Use A Spreadsheet

A spreadsheet helps you simplify your cash-flow forecast. If you use Microsoft, then Excel is your best bet. It’s simple, and does all of the calculations you’ll need it to do. On a Mac, you’ll use Numbers. Spreadsheets are pretty low-tech, but you don’t need a high-tech solution.

A spreadsheet also has the advantage of being an inexpensive solution. While dedicated cash-flow software exists, it isn’t free. If you have iWork or Microsoft’s Office suite, then you won’t be paying extra for a dressed up spreadsheet. Don’t think of a spreadsheet as “settling” either. Both Excel and Numbers perform powerful and complex calculations. So, if you ever need to do more advanced accounting, a spreadsheet can be scaled up to fit your needs.

Enter All Income

The first step in designing your cash-flow statement is to input all of your income. Total up all of your current month’s income. If you are half-way though the month, add up everything you’ve made so far and estimate what you think you’ll make for the rest of the month. If you’re starting a new month, estimate what you think you’ll make for the coming month. Make sure you also account for any variability in your income. If you run a business that is affected by different seasons or has a unique yearly business cycle, take that into account when writing out your income.

Plan ahead for any cash shortfalls by accumulating a cash surplus during times when you make more than you are spending. How much of a cash reserve you need really depends on how variable your income is. In general, however, you should strive for a 100 percent cash reserve. In other words, for every dollar of liability you incur, you should have $1 in reserve over and above the amount necessary to pay for those liabilities. This will give you about a month’s lead time to adjust for any radical shift in income.

Enter All Expenses

It’s just as important to enter all of your expenses as it is to enter all of your income. While income sources might be limited (i.e. you may derive most of your income from sales, but they may be funneled through your merchant account which is essentially one source). Expenses can be trickier to record. Some expenses are reoccurring on a monthly basis. Other expenses are reoccurring on a semi-annual basis.

Because of this, it’s often necessary to comb through an entire year’s worth of expenses. Looking back over the course of a year might help you to figure out just how much money you spend over the course of a year. Then, you can divide this amount my 12 and generate a monthly expense amount. Even for expenses that do not reoccur every month, it’s often helpful to include them in a monthly cash-flow forecast so that you can plan for those expenses.

Subtract Income From Expenses

Subtract all income from all of your expenses. The remaining figure is your surplus or savings. This is the amount you can reinvest in your business add to your paycheck.

Make Constant Adjustments

Unlike a cash-flow statement that is prepared for a bank, you will probably have to adjust your statement from week to week or month to month. That’s fine. Just make sure that you reconcile the forecast with your actual bank account. Your total bank deposits and withdrawals should equal each other.

Guest post written by Elizabeth Goldman and brought to you by Wonga – the short term loan experts.