It keeps suppliers and employees happy.

You might save more in months where you have a surplus, step up your receivables collection efforts, or establish a line of credit with your bank to guarantee enough working capital to last the period. When you can predict months in which you might experience a cash shortage, you can take steps to plan for them.

It decreases the impact of cash shortages.

Cash forecasting can help you predict the months in which you’re likely to experience a cash deficit and make necessary changes, like changing your pricing or adjusting your business plan.

It helps you identify potential problems.

Not so! It’s absolutely essential for every single business. ( If you just want to dive into cash flow forecasting, check out our free cash flow forecast template.)Ĭash forecasting may sound like something boring that accountants do in big companies. You can also use the information provided on past cash flow statements to estimate your expenses for the period you’re forecasting for. With a cash flow forecast, you ignore sales on credit, accounts payable, and accrued expenses, instead focusing on the revenue you actually expect to collect and the expenses you actually expect to pay during a given period. Unless Wayne Enterprises has plenty of cash on hand at the beginning of the month, they will have trouble covering their expenditures until they start receiving cash from clients. On paper, the business looks healthy, but all of its sales are tied up in the accounts receivable.

The company will have $50,000 of revenues for the month but won’t receive any cash until February. In cases like these, a business owner must plan how they will cover costs before receiving the payment.įor example, say Wayne Enterprises ships $50,000 worth of security products to customers in January, along with invoices that are due in 30 days. This usually happens when customers are allowed to pay after the product or service is delivered. It’s not uncommon for a business to experience a cash shortage, even when sales are good. A cash flow forecast (also known as a cash flow projection) is like a budget, but rather than estimating revenues and expenses, it estimates cash coming in and going out based on past business performance.

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