Ensure You Can Manage Your Business Cash Flow

Business is never static. While it’s vital to scale and grow your business for success, this needs to be done in a sustainable, responsible way. Grow too fast and you won’t have the resources to support your ambitions; grow too slow and you might get left behind by competitors.

One way to plan for the future properly is through forecasting. This lets you understand how future trends are likely to impact your business and ensures you’ll have the cash flow to thrive.

While it’s important to budget for today, it’s also vital to invest for tomorrow. If you want to grow organically, you need to understand how demand for your products and services is likely to change over time, as well as the impact this will have on your business finances. That way, you can spend money responsibly, ensuring you can meet your operational commitments while putting cash aside for future business development.

When it comes to forecasting your cash flow, you’re first going to need to do some preparation.

Preparing to Forecast: Measurement and Analysis

The first stage of forecasting your cash flow is gathering information on how you’ve done historically. Look back at your business performance and gather data like:

  • Total sales by day, week, month and any other relevant time periods
  • Revenue broken down by income streams, products and services 
  • Expenses in all your business budget areas 
  • Marketing performance and return on investment 
  • Analytics like website visits, calls taken, customer service resolutions, etc. 
  • Anything else that might be relevant

What you want to understand here is how your sales, revenue and cash flow change over time. All of the above areas have a direct impact on the money in your business, and analyzing how things changed can help you uncover surprising data.

You’ve pulled together all the data for Blue Widget Co. and know exactly how many widgets you sell each week and how much money that brings in. You’ve been able to tie any increases back to marketing. You also understand exactly how much you’re spending in your business budget on a weekly basis.

Preparing to Forecast: Business Growth

The next major factors that will help you forecast your cash flow are your strategy and plans for growth in the coming year. This might include increasing sales through:

  • New marketing and promotional activity
  • Product and service development and launch 
  • Expanding into new markets 
  • Reaching consumers in new ways

On the other side of things, you will need to take into account increased costs, such as: 

  • Hiring more employees to deal with demand 
  • Buying more inventory to meet customer needs 
  • Higher operational costs for distribution, utilities and miscellaneous expenses

Your marketing efforts and new product development are likely to increase sales by around 40 percent next year. As a result, you will need to hire a couple more sales and customer service staff, which is going to increase your staff costs by 25 percent. You believe you’ll see increased expenses of roughly another 5 percent elsewhere in the business.

Preparing to Forecast: Research and Insight

Finally, there are likely to be other factors outside your control that will impact future demands for your products. These could be unique to your particular location, industry or niche, or they might be wider ranging like population changes or shifts in public attitude. In particular, new competitors and disruptive products can significantly impact your marketplace positioning.

Consult market research reports and read information from thought leaders in your field so you can understand the impact these changes are likely to have. For example, the Bureau of Economic Analysis provides current briefings on the performance of various industries.

Forecasting Cash Flow: Predicting the Future

Now that you have this information, you can use it to predict what your cash flow is likely to be.

  1. Start by taking your historical data as a baseline including your revenue, units sold, expenses and other factors over a given period of time
  2. Look at your analytics and see any seasonal or other trends in your data
  3. Tie back previous marketing and promotional events to changes in your revenue and units sold
  4. Factor in your future marketing efforts with a prediction on how that will impact product demand
  5. Explore how new product launches or changes to your business model will affect sales
  6. Account for changes in your budget like increased staffing or miscellaneous costs
  7. Look at other potential changes such as new competitors, business environment shifts or demographics that may impact your business

This process will help you build a forecasting model. The idea is to create a number of different “scenarios” based on the various ways things could change in future. These models won’t be perfect; they’re just there to guide you in understanding what your future cash flow is likely to be.

With the insight you’ve gleaned, you create four forecasts for Blue Widget’s cash flow:

  •  Small downturn: 20 percent lower revenue, 10 percent decrease in operational costs
  • Steady as she goes: 5 percent higher revenue, 3 percent increase in operational costs
  • A minor boost: 20 percent higher revenue, 10 percent increase in operational costs
  • A major shift: 35 percent higher revenue, 20 percent increase in operational costs

How to Use Cash Flow Forecasting to Manage
Your Business Better

Once you have an idea of how things are going to change, you can use this to plan and manage your business finances more effectively:

  • Get new agreements in place with suppliers to meet likely future demand
  • Bring on staff who can support sustainable business growth
  • Buy enough stock and inventory to meet customer demand 
  • Build a bigger cash buffer so you can survive any downturns 
  • Tweak your strategy to take advantage of new opportunities 
  • Invest in new business growth

There you have it: a simple guide to cash flow forecasting. This can be a complex topic, and there are plenty of areas you’ll need to take into account...so use this as your starting point. As your business matures, you can build more factors into your cash flow forecasting and models, which will help you prepare for the future with confidence.

Read More About Cash Flow

What is a Cash Flow Statement?

A cash flow statement is a report that summarizes and calculates your cash flow — the movement of liquid assets into and out of your company. Along with your income statement and balance sheet, it is one of the most fundamental financial reports you can create for your business. The Securities and Exchange Commission (SEC) […]

Dissecting the Cash Flow Statement (Example Included)

Given its importance, identifying and preserving a steady cash flow should already be a priority. If it’s not, there’s no better time to start tracking it as one of your most significant metrics — and the best way to do that is to start with a cash flow statement. Here is a complete breakdown.

How Can I Maximize the Benefits of My Business Credit Card?

Having a business credit card is about more than just boosting your company’s short-term spending power. Business cards bring other inherent benefits to you as a business owner and to your organization, including cash back rewards, purchase protection, and the ability to build business credit. You can do things to boost these advantages before you […]

What is the Difference Between Business and Personal Checking Accounts?

Your business checking account is your cash flow hub — the place where revenue is deposited and expenses are paid. Though you could likely get by using your personal checking account to operate your firm, business accounts are often equipped with unique features that aren’t available with personal accounts. On the flip side, business accounts […]