Cash Flow Forecasting 101: A Survival Guide for New Small Businesses

Cash Flow Forecasting 101: A Survival Guide for New Small Businesses

Cash Flow Forecasting 101: A Survival Guide for New Small Businesses

As a small business owner, knowing how much money your business will bring in and spend during the next month, quarter, or year, can be key to making sure you have enough cash to keep your business going. That cash in/cash out formula is the essence of cash flow forecasting.

But unless you have a strong background in finance, you may find the cash flow forecasting process daunting.

It doesn’t have to be. Here we’ll share what cash flow forecasting for entrepreneurs means, how it works, and tools and resources you can use to make informed decisions for your small business. 

What Is Cash Flow in Business

Cash flow in business simply refers to the amount of cash and cash equivalents coming into your business and the cash being spent by your business. By cash, we don’t mean coins and dollar bills, but rather cash-equivalent sales, whether those are made with a credit card, debit card, ACH, PayPal or any number of payment methods. 

Typically this cash flow is recorded on a cash flow statement which will usually contain the cash/cash equivalents at the beginning of the year, an operating activities section, an investing activities section, a financing activities section, the increase/decrease of cash equivalents between the three activities sections, and then the total cash/cash equivalents for the year.  

The most popular financial statement for understanding business cash flow is the Statement of Cash Flows. 

Forecast Definition

Forecasting refers to the use of historical information or data to predict the future. Forecasting is used in many financial industries; from broad macro economic questions such as expected GDP growth, all the way down to an individual business level when it’s used to predict cash flows, sales, expenses, product demand, and more. 

What Is Cash Flow Forecasting and Projection

Cash flow forecasting and projection is where businesses use forecasting models to make educated guesses about their upcoming cash flows for the next month, quarter, year, or other period of time. It’s key to smart financial decision-making. 

Cash forecasting helps small business owners: 

  1. Understand their business liquidity,
  2. Make informed short-term and long-term business plans,
  3. Plan the use of business credit cards/loans for cash flow shortages
  4. Strategically get small business loans to help the business reach its financial goals

Cash flow management is one of the most important financial tasks for any business owner. Run out of cash too often (negative cash flow), and your business might not be able to keep the lights on. And while positive cash flow can be great, sit on too much cash and you may miss out on opportunities for business growth. 

What New Small Business Owners Need To Understand About Cash Flow Forecasting

Cash flow forecasting is not an exact science. Your business will likely encounter cash flow shortages from time to time. Clients pay late (or don’t pay at all) and you may find your own business struggling to pay its bills on time. The market can change quickly, as it did in the spring of 2020, for example, and even the most well-thought-out financial plan will have to change. 

Short-term forecasts are usually the most accurate, followed by medium-term forecasts. Long-term forecasts are the most likely to change—especially if your forecasting period is longer than a year.  

Still, forecasts give you a crucial starting point. You’ll still need to monitor your actual cash flow. If you notice that accounts receivable are piling up, sales or income is declining, or expenses are rising, for example, you’ll need to act quickly to avoid a severe cash shortage.  

Think of the forecasts as another tool in your toolbox when it comes to decisions such as expansions or taking out a business loan.

How To Do Cash Flow Forecasting

The most basic cash flow formula is:

Beginning Cash Balance + Projected Cash Inflows – Projected Cash Outflows = Ending Cash Balance

The formula behind cash flow forecasting stays the same no matter what model you choose, but there are variations depending on the type of cash flow analysis you’re trying to get. 

Other cash flow formulas include:

Free Cash Flow (FCF) = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure

Operating Cash Flow (OCF) = Operating Income + Depreciation – Taxes + Change in Working Capital

With this in mind, once you have chosen the model you want to use and have predicted the cash coming in and going out of your business during the period you are interested in, you’ll take your take your current cash position (opening balance), add in projected cash inflows, subtract the projected cash outflows, and then you will have your cash flow forecast.

If you don’t have software to do this for you (see below), a simple Excel worksheet is probably the easiest option. Once you create the model, you can return to it when you want to create new cash flow projections. You can even use Excel cash flow forecast templates available online to help you get started.

That said, cash flow analysis can be much more sophisticated. For operating activities some simply use the direct method (cash in – cash out) while others use the indirect method which also factors in depreciation and amortization.

If you don’t know how to create or review a cash flow statement, or other financial statements, you can ask your accounting professional for help, or you can use the software resources we describe below.

Understanding and Choosing a Cash Flow Forecasting Model

Creating your forecasting model depends on what you want to forecast, the time period you are evaluating, and the forecasting method you are using. Once you know the time period you are looking at you can figure out which cash flow forecasting method to use:

  1. Direct forecasting: With direct forecasting you will likely use cash flow data from your bank accounts and enterprise resource planning (ERP) systems for your models. This typically works best for short-term forecasting but can also be used for long-term forecasting if you have the data. 
  2. Indirect forecasting: Unlike direct forecasting, indirect forecasting uses previous financial statements to predict your businesses liquidity levels. This method is often used for longer-term forecasting.

Is There Cash Flow Forecasting Software Available?

Yes there are several cash flow forecasting software programs available to entrepreneurs. 

First, start with your accounting software. If your bookkeeping software is up to date, you will often find built in tools that allow you to create financial statements that are fundamental to creating an accurate cash flow forecast. It may also offer more advanced cash flow forecasting tools. 

Beyond that, here are tools you can use for more advanced financial planning and forecasting:  

Float

Float allows you to easily generate different cash flow forecasts for your current situation and a wide range of scenarios. You can easily see how a new hire or a new project may impact your cash flows. Plus it easily integrates with QuickBooks, Xero, and FreeAgent so you know your information is up to date whenever you forecast.

Pricing: There are three plans available. Essential starts at $59/month, Premium starts at $99/month, and Enterprise  starts at $199/month. All plans come with a 14 day free trial.

Core benefits and features:

  • Integrates with QuickBooks, Xero, and FreeAgent
  • Allows you to test out different scenarios
  • Track and predict cash flows for projects and company as a whole

Fathom

If you want a tool that will do more than just cash flow forecasting, Fathom is worth considering. Not only does it provide cash flow forecasting but automation tools also track key KPIs such as asset turnover, gross profit margin, return on equity, and much more (you can also create your own KPIs). It can also show you your top expenses, profitability breakdown, and your company’s growth trends. 

When you are ready to create reports such as an annual performance report or revenue analysis, you can do so through the platform customizing them as much or a little as you want.

Pricing: Prices start at 37 euros/month for one company and go up from there. Every plan offers a free 14 day trial.

Core benefits and features:

  • Can link multiple businesses
  • Supports 7 integrations including Excel, QuickBooks Desktop, QuickBooks Online, and Google Sheets
  • Offers additional tracking beyond cash flow forecasting such as KPIs tracking and report generation

Calxa

With Calxa you can easily create cash flow forecasts or use an integrated 3-way forecast model. You also have the ability to create budgets, generate a wide range of reports, and even track KPIs. Plus they offer 4 different integrations so you can easily keep your reports and forecasts up to date.

Pricing: There are 5 tiers with the lowest starting at $140/month. Each tier offers a free 30 day trial.

Core benefits and features:

  • Integrations with MYOB, Unplugged, QuickBooks, and Xero
  • Create cash flow forecasts, generate reports, track KPIs, and more
  • Can track multiple companies at once

Cash Flow Frog

If you don’t need some of the bells and whistles that come with other programs out there and are looking to save money, check out Cash Flow Frog. You can create your cash flow forecasts, generate a cash flow statement, and check out different scenarios. 

Pricing: The standard plan is $39/month and the premium plan is $49/month. Both plans offer a free trial.

Core benefits and features:

  • Offers 7 integrations including QuickBooks Online, QuickBooks Desktop, and Sage Intacct
  • Allows you to create cash flow forecasts, cash flow statements, and look at different scenarios
  • Consolidate different businesses

How Nav Helps Small Business Owners With Cash Flow 

If you’re looking for a super simple way to keep on top of your small business cash flow and take control of your business financial health, Nav can help. 

Monitor and analyze your cash flow across all your business accounts by connecting unlimited bank accounts. Get a cash flow health snapshot so you can instantly monitor your overall performance and take action. Get balance alerts and more.

Also key: Nav can help you find the financing your business needs. Whether that’s a line of credit to weather cashflow ups and downs , a small business line of credit to improve cash flow, or a small business loan to take your business to the next level, you can be ready for what’s next. 

Practical Tips for Improving Cash Flow

Business owners who want to sleep well at night will look for ways to improve their cash flow, and overall business financial health. Here are a few suggestions:

  1. Take advantage of net-30 payment terms with vendors and suppliers
  2. Audit spending to cut out unnecessary expenses
  3. Improve efficiency and productivity (for example with AI tools)
  4. Collect payment upfront; offer discounts for fast payment
  5. Invoice early and often
  6. Make it easy to for customers to buy/pay
  7. Charge for late payments
  8. Factor invoices
  9. Raise prices
  10. Sell more products or services
  11. Identify and target new markets
  12. Sell online
  13. Reduce inventory levels
  14. Streamline business processes
  15. Improve customer service to reduce churn
  16. Get and use accounting software to stay up to date on finances
  17. Use business credit cards for to buy now/pay later
  18. Use 0% intro APR business credit cards to pay over time
  19. Get a line of credit 
  20. Refinance debt for lower loan payments
  21. Monitor your cash flow frequently
  22. Establish business credit to access more financing options

For more details on each of these approaches, read 24 Ways to Improve Cash Flow for Your Small Business in 2024.

Other Cash Flow Resources

The U.S. Small Business Administration offers a free guide to understanding cash flow statements. You can also get free mentoring for your new business or existing business through SBA resource partners such as your Small Business Development Center and SCORE.   

Money Smart for Small Business (MSSB) is a joint program between the Federal Deposit Insurance Corporation and the US Small Business Administration. It includes a module on managing cash flow. 

This article was originally written on June 11, 2024 and updated on June 12, 2024.

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