For your cash disbursements, you will need to project your various expense categories, which you can determine from your accounting ledger. For some expense items like rental, electricity, supplies, and salaries, you may simply get their historical monthly averages during the previous year and project those averages to the current year, with some minor adjustments if need be. Another major disbursement item is your payments to suppliers. You will have to project how much inventory you will need to purchase monthly to meet your sales forecast. From there, you can project your payments to your suppliers based on your credit terms. For instance, if you need to pay your supplier after 60 days, you have to input the amount you expect to pay for that particular month.
Once you have your forecast that shows the total cash receipts and cash disbursements projected for each month of the year, you can now get the difference between them to determine your net cash flow. A positive net cash fl ow indicates that you have generated additional cash to your cash balance; in contrast, a negative net cash flow means you overspent for the month by that amount, which then has to be deducted from your starting cash balance for the next month. The resulting figure will be your net cash flow for the month in question.
The first month in the forecast always uses the actual cash balance in the beginning of the month but ends with a projected cash ending balance. So, when you forecast for the second month, you simply use the first month\\\'s cash ending balance as the cash beginning balance for the next month. Follow this procedure for the rest of the months.
As business events unfold during the year, you need to constantly modify your cash flow forecasts. You may have to lower your sales forecast in the middle of the year when, say, you learn that you have lost some significant customer accounts to your competitors. Or you may have to adjust your expenses upward in the last quarter of the year because of the additional sales staff that you expect to hire during the Christmas holidays. These adjustments are necessary to make your cash flow planning accurate and up-to-date.
When you understand the concept of cash flow and learn how to measure it accurately, you can improve your performance and become more competitive. It will be good to ask your business advisor or accountant for guidance when you are planning to construct your initial cash fl ow forecast. Once the template has been made, you can simply input the fi gures and can easily come up with your forecasts.
In any case, always remember that having a cash flow forecast can bring a sense of order and well-being not only to your business but also to yourself as an entrepreneur.
HENRY ONG, CMA, RFP, is president and COO of Business Sense Inc., a fi nancial advisory and consulting firm that helps small and medium businesses. Business Sense is affiliated with INPACT International Network of Certifi ed Public Accountants. You may reach him at firstname.lastname@example.org.