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  • Writer's pictureBarry Brick

Cash Flow Forecasting

Updated: Feb 13, 2018

by Barry Brick

One of the most frequent concerns I hear from business owners is whether or not they have enough cash to support the business. Many businesses find out about a cash shortfall less than one month before the problem becomes critical, forcing the business owner to put their own cash into the business or begin the process of slowing down payments.

This issue, and many sleepless nights, can be avoided if the business maintains a cash forecast showing projections for the next 12 – 24 months.

A cash flow forecast takes into account sources and uses of money, actual cash in the bank, not necessarily income.

If you run a cash flow analysis on QuickBooks, you get a format based on the Sources and Uses of Cash. This makes a comparison between the Balance Sheet accounts at two different times and determines how increases and/or decreases in each item contributes or uses cash. While this is the format that meets the requirement of Generally Accepted Accounting Principles, I find the Direct Method, as discussed below, is a better management tool.


This method is more in line with an income statement, so the owner can see how the various line items impact cash flow.

Cash from Sales is determined by total sales and any change in Accounts Receivable. If sales are the same from month to month but Accounts Receivable increases, the Cash from Sales will decrease. The reverse holds true for Accounts Payable and Cash Spending.

In addition, changes to Principal of any borrowings impact the Cash Flow Forecast but do not appear on the income statement. I have seen many businesses struggle because they didn’t anticipate the impact of paying off a loan early.

Source: “How to Forecast Cash Flow” by Tim Berry


Another area that will impact your Cash Flow forecast but not your Income Statement is changes in Inventory levels. This becomes critical if you are in a business that makes opportunistic purchases of large quantities from time to time. Without a credit line to draw on, these purchases will use cash that might be needed to meet payroll obligations next month. Although you may not know when these opportunities arise, you should include a certain amount of these if they are expected over time.

If your company is going to ask a bank to lend you money, you need to have a clear plan to be able to meet your payment obligations.


Finally, don’t forget about the owners. While owners’ salary payments are included in Cash Spending, if the owner is expecting to take distributions, make sure to include these in the Cash Forecast. On the same note, the Cash Forecast is a great device for the Owners to determine how much they will be able to take in distributions without impacting operations.

Forecasting Cash Flow is an ongoing process. It needs to be a part of the business’ monthly financial package and need to be updated for actual results each month. For many businesses, this is the primary management tool used to review the financial condition of the business.


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