The business was doing well.
Sales were coming in.
Bills were being paid.
There was money in the bank.
So the business owner felt comfortable.
Until one month, several large expenses came due at almost the same time.
Payroll was due.
A major vendor invoice arrived.
Insurance needed to be renewed.
A tax payment was coming up.
And a large customer payment wasn't expected for another three weeks.
Suddenly, the money in the bank didn't look quite so comfortable.
Nothing had gone terribly wrong.
The business wasn't losing money.
The problem was timing.
The owner had been looking at the bank balance, but not looking far enough ahead.
That's where cash flow forecasting can make a difference.
A cash flow forecast isn't a promise about what will happen. It's a forward-looking estimate of the cash a business expects to receive and the cash it expects to spend over a future period.
It can help answer some very practical questions:
Will there be enough cash to cover upcoming bills?
When are large expenses expected?
When are customer payments likely to arrive?
Can the business afford to make a major purchase?
Is it the right time to hire another employee?
Will a slower sales period create a cash shortage?
These questions become increasingly important as a business grows.
A business can be profitable and still experience a temporary cash shortage.
It can also have plenty of cash today while facing a significant cash need next month.
That's why the current bank balance doesn't tell the whole story.
Accurate bookkeeping provides the historical information needed to create a more useful picture of what's happening in the business. Financial statements can show revenue, expenses, profitability, and trends. A cash flow forecast takes that information one step further by asking: "What might happen next?"
The forecast doesn't have to be complicated.
A simple version can start with expected cash coming in and expected cash going out over the next several weeks or months.
As actual results become available, the business owner can compare them with the forecast and adjust future expectations.
The goal isn't to predict every dollar perfectly.
The goal is to avoid being surprised.
Good small business bookkeeping tells you where you've been.
Cash flow forecasting helps you prepare for where you're going.
And sometimes, knowing about a cash shortage three weeks before it happens gives a business owner enough time to do something about it.
That might mean collecting an overdue invoice, delaying a purchase, adjusting spending, arranging financing, or simply making a more informed decision.
The best time to discover a cash flow problem isn't when the bank account is already running low.
It's while there is still time to respond.
Are you managing your cash based on today's bank balance or looking ahead to what your business will need next?
A cash flow statement is a financial statement that provides information about the cash inflows and outflows of a business over a...