Preparing a Cash Flow Forecast – Three Steps to Take
Jemel Smith
Owner of TaxAssist Advisors | Tax Strategist & Real Estate Agent | Helping Realtors Maximize Their Income Through Proactive Tax Planning
Good cash flow management is vital for your business. A detailed forecast can help keep your finances in check.
An alarming number of businesses fail due to poor cash flow management, so ensuring this is handled properly is essential. A cash flow forecast is an effective way to stay ahead.
Every company that aims to prosper needs regular budgeting. However, budgeting isn’t just about keeping the company afloat.
An accurate forecast provides reliable predictions that can help plan for future funding, acquisitions, and consolidations. It also offers early warnings and supports steady growth.
To reap these benefits, businesses must prepare their cash flow forecasts strategically. Here are three key steps to follow:
Step #1: Determine the Forecast Period
When preparing a cash flow forecast, first decide whether it will cover an annual, quarterly, monthly, or weekly period.
Planning as far ahead as possible is ideal, but short-term forecasting has its benefits as well. That’s why most companies use both short-term and long-term forecasts.
Keep in mind that cash flow forecasts rely heavily on past data, so their accuracy depends on how long a company has been in business.
New companies might find it difficult or even impossible to create a long-term forecast, but that’s not a problem. Plans should be updated as circumstances change, and adjustments can be made when better estimates become available.
Step #2: Formulate the Underlying Assumptions
Several key assumptions drive cash flow forecasts, including market trends and potential pricing changes.
The more accurate these assumptions are, the more reliable the forecast will be.
Experienced companies can make reasonable projections based on past performance. Meanwhile, new and established businesses alike can benefit from industry publications and feedback from customers or suppliers.
The most important assumptions for a cash flow forecast include:
Step #3: Estimate Income and Expenses
This step depends on how long the business has been operating.
Established companies should begin by estimating income based on previous years’ figures. Adjustments can then be made to account for known trends, such as seasonal sales fluctuations.
New businesses, on the other hand, should focus first on estimating expenses. In this case, it’s best to err on the side of caution. Figures should be rounded up, and the highest possible expenses should be considered.
Building a generous safety margin into forecasts can help protect a new company from unexpected financial fluctuations.
A Good Plan Builds a Strong Business
Taking the time to prepare a well-thought-out cash flow forecast can pay off significantly in the future.
If you can develop a plan that accurately predicts cash flow, you’ll improve your company’s chances of survival and growth.
Invest the effort in creating a reliable forecast, and set your business on the right path.
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4 天前Such an important point—profitability doesn’t always mean sustainability! When working with businesses, what’s the most common blind spot you see in their cash flow forecasting, and how can they fix it before it becomes a problem?
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4 天前Cash flow is undeniably important, and with strategic forecasting, we are better prepared for future success. I also believe that once we are better positioned financially, we can step up to stronger leadership and clarity of vision for the business.
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4 天前Sharp, actionable insights like these make all the difference between struggling and thriving
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4 天前A solid cash flow forecast can guide businesses through uncertain times Jemel Smith
We help businesses attract, hire, and retain the right people—using AI and culture-first hiring | Founder & CEO @ Kelaca?|?Investor
4 天前Cash flow management is such a crucial aspect. A lot of businesses go wrong exactly here.