Just as you prepare a budget forecast, you should also prepare a forecast of cash flow. Cash flow is the life blood of any business and in simplest of terms it is nothing more than the difference between the cash that comes in the door minus the cash that goes out the door.

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At first blush, this may not sound too difficult to get your arms around, and it really isn’t, providing you have made the preparation of monthly reports, monitoring your receivables and generally maintaining good financial records an integral part of running your business. Keeping in mind that a forecast is the business equivalent of a guess, it follows that, comprehensive reports, excellent record keeping and an intimate knowledge of your business, combine to make that guess the most accurate one possible.

Why is cash flow important

Knowing your probable cash flow is a critical component of most decisions you make in your business. Cash flow affects decisions on the subject of taxes, equipment purchases and borrowing needs, to mention just a few. A cash flow analysis can reveal problems that need to be addressed before the problems become emergencies.

Here is what you need and how to do it.

Accounts receivable

      o Your accounts receivable are a key component of this exercise. Review your accounts receivable reports for the previous 6 to12 months. Deciding how many months is a function of the volatility of your business and any seasonal factors that should be taken into consideration.

Another factor included in the equation is payment terms; due on receipt, net 10, net 30, etc. An analysis of this report will tell you what is owed to your business. Part two of this analysis is determining what the business is actually collecting. Remember, it isn’t “cash flow” until the money comes in the door.

If you discover a problem in this critical function, you need to fix it. One “fix” might include outsourcing receivables to a factoring business. You can convert receivables into immediate cash at a small discount by taking advantage of such a service. Using an online invoice factoring calculator you can see how much cash you would receive as a result of assigning your receivables to a factoring firm.

Other cash resources

      o This is simply a tally of other cash resources, such as the pending sale of property owned by the business, anticipated deposits from clients for purchases or projects, potential cash injections from investors, bringing on a partner, etc.

Expense detail

      o Review your expense detail to determine cash outflows. Begin with your fixed expenses, such as rent, payroll, insurance, utilities, etc. This will help you focus your thoughts on the expense side of the business. Then you have the proper mindset to consider variable and non-recurring expenses. Added together, this will give you a reliable estimate of business expenses.

Having analyzed these three elements of your business, you should have an excellent grasp of the cash flow your business generates. Naturally, the newer the enterprise, the less predictable future cash flows will be. Established businesses, with a lengthier financial record, should be in a position to forecast cash flow with reasonably good accuracy by following the steps outlined. This exercise should highlight the importance of keeping detailed, accurate records and how these records relate to the success of your business. Careful record keeping can benefit your business in a number of ways. Forecasting your cash flow is but one benefit.

Andrew Cravenho is the CEO of CBAC LLC, an innovative invoice financing exchange. As a serial entrepreneur, Andrew focuses on helping both small and medium sized businesses take control of their cash flow. Prior to CBAC, Andrew founded an annuity financing company relieving tort victims of financial hardship.

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