This article was originally written for my column for Inc.
Predicting your business’s cash flow is essential for making informed decisions and ensuring financial stability. The following are five steps to help you forecast your cash flow effectively. These tactics have empowered my fractional CFO clients to hire key employees earlier, secure millions in additional funding ahead of critical growth phases, and make strategic cuts before financial challenges escalated.
1. Track weekly cash inflows and outflows
Begin by recording all the money coming into and going out of your business each week. The goal is to determine how much cash you have available at the end of the week. You can use a simple spreadsheet or automate the process with an app like FinDaily. Consistent tracking provides a clear picture of your financial activities and effectively manages your bookkeeper.
2. Start creating a forecast with averages
Create a forecast using your Income Statement from the past three months to calculate a three-month rolling average of your inflows and outflows. If your business experiences seasonal activity, extend this to a 12-month average for better accuracy.
Starting with these averages allows you to engage key personnel in meaningful discussions about future trends, making adjustments based on informed predictions rather than guesswork.
3. Fill in the forecast with actuals
Filling your forecast with actual numbers ensures you’re working with a realistic and actionable plan, making it easier to spot trends and make timely adjustments as your financial situation evolves. This level of detail helps you stay agile and prepared for changes, whether cutting costs, increasing investments, or addressing cash flow gaps. Here’s how:
Employee wages: Include all costs, such as salaries, benefits, and overhead. For hourly employees, base your forecast on the average hours worked over the past few payrolls. Slight variations like a few overtime hours shouldn’t be concerning, but if you’re cash-strapped, you need to control or limit overtime hours worked.
Projects that have been won: Add revenue from secured projects or confirmed customer orders to your forecast, giving you confidence in upcoming cash inflows.
Fixed expenses: Don’t forget predictable costs like rent, subscriptions, or software expenses. Including these ensures your forecast accurately reflects unavoidable outflows.
4. Maintain a backlog of confirmed projects or customers
Keep a record of all secured projects or confirmed customer orders. The backlog should include the amounts to be collected by month. This backlog is a reliable indicator of future cash inflows.
Monitoring the backlog consistently also ensures projects stay on target dates, giving you the insight to adjust your strategy. During slower months, you can be more aggressive with pricing to win work, while in busier months, you can afford to be less aggressive, maximizing profitability without overloading your capacity.
5. Review your sales pipeline regularly
Regularly assess your sales pipeline to understand potential future income. By evaluating ongoing negotiations and prospective deals, you can estimate the likelihood of these turning into actual revenue, aiding in more accurate cash flow predictions. The most important items to track are:
Proposals issued,
The dollar value of the proposal and
Likelihood of win
Consistently tracking your pipeline gives you, as a business owner, the clarity you need for accurate forecasting. With regular pipeline reviews in place, you can hold your sales team accountable and ask the critical questions that drive results: Why are proposals down this month? Why hasn’t this deal closed yet?
These steps will create a practical cash flow forecast, enabling you to make proactive decisions and maintain your business’s financial health.