Building Your Short Term Cash Flow Forecast

businessman looking at short term cash flow forecast on ipad

Understanding cash flow is a crucial component for any company, whether you’re operating a startup,  have early revenue, or you’re in the growth stage and scaling quickly. While a long-term cash flow forecast can help business owners understand the big picture, drive growth strategy across several months, and raise growth capital from investors, a short term forecast should be operationally focused to help founders make business decisions faster and more efficiently. Here are a few tips to help you build and understand a short term cash flow forecast.

 

Four simple rules to build an accurate, agile short term cash flow forecast

 

Don’t Let It Be Intimidating!

Building a short-term cash flow forecast for the first time can be a little daunting. You can make the task less intimidating by starting with a 30-day look back into your business to gather insight on cash flow patterns. What have the last four weeks generated regarding cash in and cash out? Were there unordinary expenses that won’t affect the upcoming month or quarter? These details lay the foundation for creating your short-term cash flow forecast. If you’re just getting started in business, think about what’s to come in the next 30 days based on your best estimate of future activity. And understand that there are companies that lend a hand in this process if it all seems like too much to add to your plate.

Start Small

You should be looking at your short-term cash flow on a daily or weekly basis to ensure you have the right perspective on business operations. Start by evaluating how much cash you have on hand at the beginning of the week, and then take a close look at cash receipts. What invoices do you expect to be paid and what other cash, like equity, do you expect to come in during the week?

Once you’ve answered these questions, move on to what’s going out. You don’t need to write down every bill you pay each week, but you do need an idea of known costs like payroll, accounts payable, and credit card payments that you pay. Your short-term cash flow forecast should be projecting your cash position out for the upcoming 13 weeks so you can make informed decisions on covering a cash shortfall or utilizing an excess of cash appropriately.

Keep it Simple

Some entrepreneurs are intimidated by cash flow forecasting because there is an assumption that the numbers included in the forecast need to be down to the penny. They don’t. Instead of spending hours each day on your short-term cash flow forecast, keep it simple by categorizing your inflows and outflows. Use natural groups specific to your business to breakdown cash receipts if necessary. If inventory is a significant part of your cash outflow, include that as a line item on your forecast.

Avoid Unrealistic Optimism

While you may think inflating a cash flow forecast sheds a brighter light on your business to potential investors, doing so serves no purpose in day to day operations. When short-term cash flow forecasts are off, your long-term cash flow suffers making it difficult to gain an understanding of how healthy your business truly is. Misrepresenting your forecast could lead to running into a costly shortfall, like missing payroll or being unable to invest in growth for the future. Take a realistic approach to developing your short-term cash flow by reviewing historical data of outflows and inflows, and steer clear of using the high end of revenue estimates or the low end of expenses in the process.

Creating a short-term cash flow forecast for the next 13 weeks of your business gives you the control you need to make informed decisions. You can easily point to a short-term cash flow forecast and see how gaps in revenue or increases in expenses affect your ability to hire, purchase new equipment or inventory, or implement another growth strategy. Having the short-term cash flow forecast down allows you to move toward long-term cash flow forecasting accurately, giving you the data necessary for fundraising and strategic planning.

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