If you’re a business owner, you have to be careful of assuming you’re in better financial shape than you actually are.

It can be tempting to look at your bank account, see you’ve got a bunch of money, and assume your business finances are healthy.

But it’s naive to think that how much you have in the bank is how much you really have. 

Your bank balance is just a snapshot in time. It’s not a true indicator of what you actually have. It’s not going to tell you if you’re cash flow positive or if your business is growing.

To understand that, you need to do cash flow forecasting.

What is cash flow forecasting?

Cash flow forecasting helps you know what’s going out and what’s coming in. It answers questions like:

• Where am I now?
• What do I have to pay? 
• What do I expect coming in over a specific period of time?

Why does cash flow forecasting matter?

While checking your bank balance is good for knowing what you have today, cash flow forecasting helps you have a realistic view of what you’ve actually got.

For instance, you may have a million dollars in the bank right now along with an outstanding bill for $800,000. Checking your bank balance isn’t going to tell you that you really only have $200,000 to work with, but cash flow forecasting will make sure you know that actual amount.

You need to know that actual amount.

Because if you’re trying to decide to make a capital investment, such as bringing on a new employee, by looking at your cash flow forecast, you can know if you’ll have the money to afford this new hire.

And if you’re not sure how to do it yourself, let me share how I do it for my clients.

How I do cash flow forecasting for my clients

If I’m meeting with them weekly, we’ll go over the following:

• How much cash do we have today
• How much we expect to come in over the next seven days
• How much can we afford to go out in the next seven days

During the meeting, the owner will review this information and make comments. 

Then, we’ll come up with a plan on figuring out what goes where and my team will pay the bills the owner wants to pay. 

The following week, we go through that process again. 

How often should I forecast?

A granular, weekly approach is really important for businesses that are operating on a week-to-week basis. But you don’t need to do cash flow forecasting every week.

A common way to look at it is a 13-week forecast. Determine where you are today and determine where your cash will be in 13 weeks if things go as you expect.

Even if you’re blessed enough to have a big fat chunk of cash in the bank, you should still forecast.

Because you want that cash to grow. Forecasting helps you know if you’re making money or if you’re potentially losing money. 

Why you should document your forecast

If you’re like a lot of business owners, you’re just doing the forecasting in your head. 

The problem is, if you’re doing it all in your head, it’s easy to lose track of what’s coming in and going out, which makes it easy to miss something. 

And when you miss something regarding how much you owe, it could cost you. You have to work through this so you don’t spend all your cash only to realize you still need money for payroll or rent.

Or you may miss something regarding how much you have coming in, which could still hurt your business because that might mean you put off an investment that you could afford to make because you didn’t think you had the money for it at the time.

Either way, documenting your forecast is a great indicator of if you’re making or losing money.

What to know about forecasting and outstanding bills

You may do this and find that you’re going to end up with outstanding bills from vendors who want to get paid.

 But you may be able to take some of the pressure off of them asking for payment if you communicate with them about your situation. 

By letting them know that you’re working to get payments out to them, you’ll likely satisfy them (at least for a little while).

Forecasting helps you know when you should have these conversations.

And this is something to keep in mind if you’re waiting to get paid by your clients. Because they might find themselves in the same boat: They’ve done their cash flow forecast and realized they can’t pay you on time. 

In these cases, it’s important to know that most businesses don’t purposely avoid paying their bills. So, it’s likely your client isn’t just refusing to pay you.

They could be battling cash flow issues.

This doesn’t mean you shouldn’t request payment for your services, but it might provide some insight as to why a client hasn’t paid you yet.

As a side note, my team and I can help with the back-and-forth that comes with getting unpaid invoices paid.

Bottom Line

I hope this blog post encourages you to think about doing cash flow forecasting for your business. And if you’re not already documenting your forecasting, I hope you’ll start. 

If you need help doing this, my team and I can help. We’ll present the forecasting information to you, help you determine a plan, and work with you to execute that plan. 

Click the Schedule a consultation button to book a call.