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FORECAST YOUR CASH NEEDS

Will your business have to borrow money next year? Do you know exactly when you'll need the cash? When might be the best time to make the down payment on an expansion? Can you afford to hire several new employees at once?

These are the types of questions that a cash forecast answers. It is simply a record of probable income and expenditures for a future period. It won't solve cash management problems, but it will provide the information and control you need to deal with them. With a written cash forecast, you know when to expect a cash shortage or excess so you can plan your borrowings and your investments. It will also help you show lenders exactly when and how you'll pay them back. And the fewer surprises you hand your banker, the more cooperative he's or she's likely to be.

A cash forecast also serves as a control mechanism if projected figures are compared with actual figures. If you planned on a $150,000 cash inflow for June but received only $80,000, the discrepancy will be clearly visible if you have a cash budget--though the budget won't tell you the reasons for a problem. Maybe you weren't getting enough product to one of your markets, or your customers might have stretched their payables. But no matter what causes you find for the problems, a cash forecast will help you keep your fingers on your company's pulse.

One method of preparing a cash forecast requires financial information from several prior years and takes four basic steps:

1. Estimate sales for the forecast period, a year in this instance
2. Break down the annual sales figure into monthly units to reflect any seasonal factors.
3. Construct pro forma income statements from the monthly sales figures.
4.  Translate the income statement information into a cash forecast.

In light of all you know about your own operations, your competitors, your market, and the economy, how reasonable is this projection? The questions you ask serve to make the sales projection figures realistic. "What will influence our sales growth for the next 12 months? What are the prognoses for related industries? What are the various forecasts--from our industry associations, from government statistics, and published sources? Are there government factors to be considered?" In short, having taken into account all that is likely to affect next year's sales, you arrive at a reasonable number for those sales.

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By using just a historical average, however, you'll limit your ability to grow. To make sure it isn't letting history determine your future, you may approach the sales projection from the other side, asking, "What kind of sales volume do we want next year? Can we do it? Why is such a goal likely, or why isn't it?" By coming at the problem from more than one angle, you increase your chances of arriving at a realistic projected sales figure.

This kind of cash projection, with monthly performance reviews and revisions, is the first step to sound cash management. From here, owners can go on to properly time loans and repayments, assess the impact of borrowings and investments, and fine tune the company's cash needs for continued growth.

Click here and check out the recommended books on our book shelf for more information on cash forecasting and budgeting.