In speaking with business owners all over the country, I have found there is a misconception about forecasting for sales and your cash flow forecasting. Forecasting is simply the process of planning ahead. It’s taking your original budget and making adjustments for what I call ‘new news’. No it’s not fortune telling or guessing. It’s predicting what will happen before it happens and adjusting your plan to avoid the inevitable – NEGATIVE CASH.
The key to predicting a good forecast is being certain that you know what you are predicting. Remember cash does not equal profit. Therefore, you need to have a sales forecast as well as a cash flow forecast. Monitoring the two together will allow you to keep a positive cash flow.
Sales forecasting is the process of predicting your monthly sales over a year. This is the actual sale of a product or service, not whether or not is has been paid for. Think of Best Buy. Let’s say for example, that during their annual budgeting process they budgeted sales of $1 million dollars for the month of December. All of a sudden, Samsung announces a new tablet that does everything under the sun. Based on this new news, Best Buy now needs to make a forecast adjustment (“change the budget”) of an increase of $500,000. So now their planned December sales are $1.5 million dollars. Now I put change the budget in quotes because you never really change the budget. Your system should allow for forecast adjustment. But that is a different blog.
Cash Flow Forecast
Cash flow forecasting is the process of predicting when monies are coming in the door and going out the door. It’s a game of matching. The goal is to match the revenue coming in to the expenses being paid out, all while keeping your bank balance in the black. Let’s take another example, let’s say your business brings in physical cash of $5,000 once a month. And every month you pay out expenses of $2,500 (good margins huh?). Well all of a sudden your largest customer has their own cash flow problems and has to pay you late. But you still have to pay your bills on time. So now, you have to move some expenses around, say from the 10th to the 25th, day of the month so that you pay them after the deposit comes in. Otherwise, when you pay the bills you won’t have enough money and your bank account will be overdrawn.
So you see, in order to keep your bank balance from being in the red, you have to take the time to look at your numbers and know what’s going on.
Do you currently have a process in place for forecasting? How much is it helping your bank balance?
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