How to Do a Cash Flow Forecast in 2021
By doing a cash flow forecast you can stop worrying about cash flow fluctuations and find answers to questions like:
- Whether and how much a dip in sales in one month will affect your ability to pay bills on time?
- Can you afford to hire a new team member?
- If you could go on holiday in six months’ time, without worrying about paying bills on time.
If these are the questions in your mind right now, or you want clarity and control over your cash flow situation, then you’ll find the learning in this article useful.
So every year, one of the tasks I do with my clients is to reflect on the last calendar year and do a yearly forecast based on the previous few month’s business conditions.
We build three scenarios:
- The worst-case
- Most likely, and
- The best-case scenario
It gives my clients cash flow clarity and allows them to check how far they are. This also leads to sound financial decisions and instills financial discipline in them.
To help you do the same, I am walking you through the process of setting up a cash flow forecast in 2021.
This works whether you are doing 5, 6, 7, or 8 figures in revenue.
Let’s start by understanding the basics.
Cash Flow Forecasting Basics
1 | What Is a Cash Flow Forecast?
Just like you hear the weather forecast, whether it is going to rain? What is the temperature going to be etc?
You also do a cash flow forecast to have an educated guess of how much cash is going to come, how much cash is going to go out, and what the cash position in the future looks like today?
2 | How Does the Cash Flow Forecast Help You in Business?
Wouldn’t it be better if you knew, what’s most likely going to happen in the future, today itself, so that you can make changes accordingly?
If you knew, it is going to rain heavily in two weeks, then you will postpone your outdoor activities. Right? And, it is much better than rather finding out on that day itself, that the weather is really bad.
In the same way, if you have the future cash flow position information today then you can decide whether you need to change course or keep doing what you are doing.
So, if the outlook is positive you will continue to do the things, you are doing. And if it is negative, then you would make changes, so that you can be on a positive cash flow trajectory.
For e.g. if you are a creative marketing coach who is running masterminds and offering coaching.
And if the cash flow forecast suggests that masterminds won’t generate enough cash flow and coaching will bring in more cash flow and will have a more positive cash flow impact then what would you do?
Would you still continue to run masterminds or focus more on coaching?
Obviously to make sure that your cash flows are healthy you’ll focus more on coaching.
This is the value of knowing your future cash balance today as a result of your current actions and decisions.
3 | What Are the Common Mistakes, When It Comes to Preparing a Cash Flow Forecast?
One of the most common mistakes entrepreneurs make is to run their business based on the bank balance and gut instincts. It’s okay when the business is small.
But as it starts to grow, and the numbers start to get bigger, it quickly goes out of hand.
This is a classic case of cash flow mismanagement.
Unfortunately, most businesses suffer cash flow problems as a result of poor cash flow management.
They never prepare a cash statement, let alone do a cash flow forecast.
They are led to believe that the only way to solve all business problems, is to make more sales.
It only works if the sales are consistent, profitable and there is a process to collect the payments, which they aren’t always.
Which leads to another big mistake. Which is not having a cash flow runway of 3to 6 months.
As they don’t have cash flow runaway for a few good months, that’s why we see so many businesses struggle when they don’t have sales for a month or so.
4 | What Are the Steps to Prepare a Cash Flow Forecast?
I am sharing a simple five-step cash flow forecasting process with you, that you can use to do your cash flow forecasting and reap all the benefits that come by doing it.
5 Step for Forecasting Cash Flow in Your Business
Step 1 | Bring Cash Flow Statement Up to Date As of December so That You Have the Data for Last 12 Months
These are actuals what happened for the whole year in terms of cash receipts and cash payments and your cash balance as of 31 December.
Step 2 | Prepare Cash Flow Forecast Using This Template for the Next Three to Six Months
Copy and paste the info from last year and save it as raw data to work on for this year.
Tweak cash receipts by an increment of percentage, that reflects the trading condition, which will have an impact on costs of sales and expenses to run the business.
Watch this video, where I guide you, how to do it.
Step 3 | Check With Someone for a Sanity Check and Have Clear Communication
It’s a good idea to check with an expert as there will always be things you don’t know and can’t see. Rather than feeling sorry, it’s better to be safe.
This is a step that most people think to be optional. In my book, it should be essential. Because you may not see what an expert’s eye can see, 1) because they have done it so many times, and 2) because you are too close to it and may miss out on important details.
Step 4 | Make Changes to Your Business, According to What the Future Cash balance Looks Like
As you start to trade in the new year, and as the economic condition changes, people’s buying behavior also changes. So adjust your cash flow forecast accordingly.
Step 5 | Compare Each Month’s Actual Running Balance vs Forecast and Make Changes Accordingly
As you update your forecast, compare what actually happened month by month with the forecast, so that you can get better at forecasting.
This is how you can set up a cash flow forecast in 2021 to make crucial financial decisions with facts and not based on the bank balance and gut instincts.
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If you like videos more than words, then I published a video with the same content, you might want to check it out below.
