As fuel is to a car, so is cash to a business.  Without it the business will go nowhere. Without it you will not arrive to where you want to go comfortably. Without it there is no security in being sure you will arrive at all.

Business owners know how to manufacture or distribute a widget, but many fail in maintaining cash and funding the required working capital for their business. While traveling I will hear business owners say “my business is doing well, sales are up, things are great,  but I no cash have cash in the bank.” When  I ask why, and if they prepare a cash budget or cash forecast the topic of discussion changes quickly to sports.  Yes, the process of preparing the cash forecast takes time and might be painful, but the benefits of knowing how much cash you will have in the bank outweigh these costs. Much like the fuel tank in the above analogy, shouldn’t you know how much you have and if it will be enough to get you to your goal or to allow you to take advantage of opportunities that come along the way?

What information do you need to do a 12 month, 13 week or monthly cash forecast?

  1. A good estimate (forecast) of your sales by month—don’t beat yourself up—it’s an estimate and can be adjusted along the way.
  2. How long does it take your customers to pay you? If you give them terms, are they paying on time or paying beyond due date?  You’ll need to calculate the number of days your receivables are outstanding—this will be used to determine when you receive your cash. If your terms are cash, then monthly cash collected equals your sales.
  3. A list of your expense accounts and monthly amounts paid, not an average—we’re tracking cash.
  4. The monthly payment amounts on your loans and long-term obligations.
  5. If you are taking distributions (S-Corp, LLC) –you’ll need this information, too.
  6. Timing of your material purchases (for manufacturing) or product purchases (for distribution or retail) is critical to the cash forecast.

The key to a successful cash forecast is accurately entering when the cash is received and when the cash is spent. And remember, it’s a process subject to many changes along the way. My bet is that you will find where cash is leaking out of your operation–or maybe find expenses you were not considering.

Don’t give up–keep at it. Work it, then work it again.  When you see your cash in the bank you’ll thank yourself for being disciplined in preparing your cash forecast.


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