Cash Flow Forecasting - Entrepreneurial

Entrepreneurial

Definition

In the context of entrepreneurs or managers of small and medium enterprises, cash flow forecasting may be somewhat simpler, planning what cash will come into the business or business unit in order to ensure that outgoing can be managed so as to avoid them exceeding cashflow coming in. Entrepreneurs need to learn fast that "Cash is king" and therefore they must become good at cashflow forecasting.

Methods

The simplest method is to have a spreadsheet that shows cash coming in from all sources out to at least 90 days, and all cash going out for the same period. This requires that the quantity and timings of receipts of cash from sales are reasonably accurate, which in turn requires judgement honed by experience of the industry concerned, because it is rare for cash receipts to match sales forecasts exactly, and it is also rare for customers all to pay on time. These principles remain constant whether the cash flow forecasting is done on a spreadsheet or on paper or on some other IT system.

A danger of using too much corporate finance theoretical methods in cash flow forecasting for managing a business is that there can be non cash items in the cashflow as reported under financial accounting standards. This goes to the heart of the difference between financial accounting and management accounting.

Uses

The point of making the forecast of incoming cash is to manage the outflow of cash so that the business remains solvent. The section of the spreadsheet that shows cash out is thus the basis for what-if modeling, for instance, "what if we pay our suppliers 30 days later?"