Business Plans Must Have a Cash Flow Forecast- It's Essential

You are probably already a 'champion' at your trade skill or type of business, but as you prepare for making your new venture, or greatly expanding your existing business you shall have to acquire more capital, from a finance source. Now you shall hear a term that you may have thought was reserved for Accountants - a Cash Flow Forecast.

By David Z Reynolds, a senior financing consultant, www.gpcbusinessplans.com.

You are probably already a 'champion' at your trade skill or type of business, but as you prepare for making your new venture, or greatly expanding your existing business you shall have to acquire more capital, from a finance source. Now you shall hear a term that you may have thought was reserved for Accountants - a Cash Flow Forecast.

What is it? It's a forecast of all the income and expenditure for your business. So it is a well-educated guess [of sorts] an estimate of what money shall flow into and out of the business as it is developed. Just as significantly, it's also attempting to predict when these inflows & outflows shall occur.

I have written earlier about the necessity of developing a 'drawdown schedule' of expenditure for your project. Well, you take the drawdown schedule, as well as your best estimate of when sales and revenue start coming into the cash register - put them together on a timeline and you will have most of the cash flow forecast done.

You may well have a business that is very profitable on an annual basis, but if you're engaged in a business that sells crops, then the business' cash flow will be profoundly affected by the long growing period [no cash flow] followed by post-harvest sales of the crop [large cash inflow]. In such a case it is essential to find solutions to the lack of money during the time while you're waiting to have a crop to sell.

It is vital for any business to understand the inflow and outflow patterns of the business. Even a trading house will have seasonal factors working for, and against, the operations as measured in the bank account. A well-developed cash flow forecast will tell you when you may need access to loan funds, or additional capital, to keep staff and operations going. This also reminds you not to spend the bank balance when the good times come along! Planning for the predictable fluctuations, of even the most profitable business makes a cash flow forecast essential.

When you're putting this together make sure that you extend the period covered out to 3 years. Anything longer than that is just guesswork. As the actual numbers come in, the cashflow forecast must be constantly updated to ensure that the assumptions you used at the beginning were, or were not, valid. Adjustments of strategy are vital to keeping the business moving in the direction of profitability. Monthly updates are a good idea at the beginning when the business is getting established.

As you get settled into running your business you will find yourself becoming more and more fascinated by the cash flow forecasts - and finding new strategies for keeping your business growing and profitable.