Cash is the lifeblood of every business, implying that if cash is flowing in the business, the business will keep on moving and growing. Once cash stops flowing, the business will begin to experience hemorrhage and die! Hence, it’s crucial to engage in cash flow forecasting and budgeting to always know the health of your business.
Cash flow is simply the movement of cash in and out of your business. And cash flow forecasting or budgeting is analyzing the cash flow movement and making future prediction based on that analysis. Cash flow forecasting can be done via accounting systems or using Excel Spreadsheets.
Cash flow forecasting and budgeting, enables you predict the future inflows and outflows of your business so you can plan ahead for mishaps. Cash flow forecasting and budgeting insights can also enable you to maximize the use of money, control costs and avoid financial wastes.
There are three simple steps for cash flow forecasting and budgeting.
Step One: Estimating Cash Inflow
Cash inflow is simply the cash flow into your business. This is basically your cash and credit sales. Thus, the very first step is to analyze your sales for the previous week, fortnight, month or quarter, and project how these will translate into cash for the subsequent period.
If your business requires credit sales, then you need to use some probability to make these projections. Learning how to invoice and receive payments faster can also help you increase the probability of credit sales becoming cash. Once you are done, find the totals of your cash inflow projections and write it down as the total.
Step Two: Estimating Cash Outflow
Once you have made your cash inflow projections, you now have to figure out your cash outflow. Your cash outflow is the cash flowing out of your business. This makes up your cost of doing business—variable and fixed costs.
Based on your previous business financial records, analyze the cost of sales and cost of operations. Then finally sum all up. This will now help you know the total amount of cash outflow for the week, month, quarter or the year.
Step Three: Estimating Cash Balance
The final step is to put the numbers together and find the cash balance. To find the cash balance, you simple have to add your opening bank balance to your total cash inflow and deduct the total cash outflow from it.
Opening bank balance +Total Cash Inflow –Total Cash Outflow = Cash Balance
Once you are through, you can now use the information from the cash flow forecasting and budgeting to make cash decisions, manage inventory, control costs and run the entire business operations.
You can contact Multisoft Solutions Office if you need assistance or an accounting system to facilitate the process. Kindly leave your comments about this post on the comments section below!