Cash – The Other Bottom Line

A cash flow forecast is a powerful planning and risk assessment tool, one often overlooked by many companies. No matter the size or profitability of your company, developing this tool to anticipate your cash needs can be very beneficial.

A cash flow forecast is not to be confused with the statement of cash flow, a common statement that accompanies the balance sheet and profit and loss statement. Instead a cash flow forecast is just that: a projected timeline of expected cash inflows (income) paired with expected cash outflows (expenses). A forecast can easily be created in a spreadsheet or on paper. At a minimum, creating and maintaining one can project cash shortfalls when cash outflows exceed available funds.

The structure and complexity of a forecast can depend on the organization. I prefer to maintain one on a week by week basis for at least the upcoming four to five month period. Maintaining a detailed one beyond that can be a drain on time without providing much value. The cash flow forecast can be most beneficial particularly for companies that have periodic large cash payments (tax estimates, seasonal inventory purchases or balloon payments).

Remember, timing is important; the cash for sales made on terms will not be realized for 30 days, and the cash for items purchased on credit will not be disbursed for 30 days or per terms the of the invoice.

Knowing the expected ebbs and flows of your organization’s cash balance in advance can allow a company to plan ahead and avoid cash short falls. Knowing there is a projected cash short fall in the future can allow a company to plan for a loan or reduce spending. Proper planning can eliminate or reduce the need and costs associated with obtaining cash from outside of a company’s normal operations.

The end goal is to not just to develop a tool that can assess cash needs, but one that will provide timing, direction and order to your operations. By incorporating a cash flow forecast into your organization’s decision making process, you can achieve your desired outcome while reducing exposure to unforeseen problems. There are many avenues that companies can choose to meet their profit goals. A cash flow forecast can serve as a guiding tool.

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