For small businesses, as with large organizations, cash flow is paramount to financial stability. Every entrepreneur should secure familiarity with the cash flow statement. Furthermore, forecasting cash flow is a necessary foundation for establishing visions of the future. The forecast permits measurement of actual results against goals. Meeting specified targets validates success; missing itemized targets identifies where improvement is needed.
Unfortunately, common errors plague cash flow projections. These cracks in the cash flow foundation will lace their way into the future, resulting in poor strategic decisions. Entrepreneurs who are familiar with the components of cash flow statements are equipped to recognize limitations in their forecasting and seek professional accounting assistance.
Projection of operating income is often the cause of cash flow blunders. This top line of the projected cash flow statement should represent a realistic profit forecast based on available resources. The optimal starting point is a separate projection of revenue and expenses.
The next step in forecasting cash flow is considering changes in receivables and payables. This is accomplished by using figures for the average number of days that receivables and payables are outstanding. The overriding point is that cash flow is different than income because of the lag between sales and collections… as well as the lag between receiving a bill and paying it. Identifying these cash flow adjustments demands some nuance that is best obtained by initially consulting with a CPA.
Other cash flow variables are investments and financing. These do not appear on the income projection so they appear on a cash flow forecast. Investment in a new asset – such as machinery or equipment – subtracts cash. Financing such purchases by borrowing adds to cash.
The Finance Writer 