One of the key skills that a small business owner can have that will prevent their business going under, is mastery of the cash flow forecast.  If you’re determined to get back control of your business, there are some important things you need to know before you begin. Just follow these five tips for getting started in mastering your cash flow forecast.

1.  Detail; Detail; Detail!

An important factor when you start to cash flow forecast is making sure that you pay attention to the detail, as the devil really is in the detail!  The reason why this is important is because your forecast needs to have some degree of accuracy behind the numbers you put together, with the detail being derived from your assumptions and base data.  If you don’t have detail, well, the numbers won’t be very believable.  With any measure of detail in your workings, then you run the risk of not having money when you need it, putting your business at significant risk.

2.  Data and information

Another important consideration for your cash flow forecast, is to separate data and information.  This is where you clearly show what is data and what is information.  In the case of a cash flow forecast,   Data is the basic building blocks, and comes in the form of costs for inputs, or how much output can be obtained from certain inputs.  Information is the output of your numbers, and the results of your calculations. It’s critical that you make this distinction early on, because you can easily get caught up in the minutiae of the project, but forget the bigger picture. If you make sure that you clearly separate and identify your data and information into separate areas, then you’ll be fine.

3.  Check the calculations

This is possibly the single item that can set a cash flow forecast (and a business) on a path to self-destruction.  One small logic or calculation error can have big consequences, and is a big problem when using spread-sheets to construct forecasts.  For example, a simple calculation error led to a million dollar loss in one company (find links).  The safest way if you can afford it, is to use proprietary software (not spread-sheet based) designed for forecasting.  Otherwise, have someone else do it for you.

4.  Does my cash flow forecast look right?

Have you considered if the numbers you’ve generated look realistic?   There have been many instances where people complete one month and copy it to the remaining 11.  This is not realistic and will only damage your forecast and may put your business is serious financial trouble if you rely on it.  It’s not as difficult as you might think. What you need to do is put it aside for few days, then come back to it with fresh eyes, and study it critically: “does this really reflect the real world?”  This is essentially a financial model of how your business is expected to trade, so make it realistic.

5.  Don’t leave it alone.

A forecast is a dynamic thing.  The economy changes, your competitors do things that you never considered, so too must your business.  In order to maintain control of your business, your forecast needs to move with the times.  Gone are the days when you did a 12 month budget, put it in file on the shelves, and forgot about it till next year.  If you do that, you’ll soon find that you’ve run out of money in 6 months’ time.   You needed to change course, but didn’t know because you didn’t look at where you were going.  All you need to do to avoid this is to regularly review your forecast, and make sure that you update with your actual trading results.
There you have it:  5 tips for cash flow forecasting success!