Manufacturers & Distributors ARTICLE -
|
Do You Know How to Forecast Your Cash Flow? |
Target Audience: Manufacturing and Distribution Companies, M&D Industry, Forecasters, Accounts Payable, Cash Flow Interest, Performance Indicator Bench Markers
Cash flow forecasting is more an art than a science, but manufacturers who master it can sleep soundly at night. Whether you want to expand your business or just pay the bills, knowing where the cash will come from is a definite stress-reliever.
In a perfect world, money would flow in faster than it flowed out. That is, of course, every business owner’s goal. The challenge is to make the money flow in at the right time, which is what differentiates positive cash flow from profitability.
Profit doesn’t always equal cash
Profitable manufacturers can go out of business waiting for enough money to come in to meet payroll and pay suppliers. Let’s say, for example, you receive a $100,000 order that will cost you $80,000 in wages and materials. You’re likely going to have to pay out the $80,000 a month or more before the $100,000 comes in. If you don’t have the cash on hand, that could be problematic. Cash flow forecasts can help ensure that you have the cash on hand.
Cash flow forecasts are predictions of the sources and amounts of cash that will come in and the recipients and amounts that will go out for a certain period. It’s making the predictions that can be challenging.
Before you begin, understand that a cash flow forecast isn’t a history lesson. It’s a tool that gives you a glimpse of the future. Therefore, don’t allow yourself to get bogged down in analyzing past performance.
Start simply
That said, you need real data and accurate commitments to generate a useful cash flow forecast. A simple forecast begins with the basics, including fixed expenses, variable expenses, estimated income and your bank statement, which gives actual income and cost figures for comparison to billed amounts and invoices.
Start out by looking at your fixed expenses for the last year (or a period equivalent to whatever period you want to forecast), and use those numbers to project your fixed expenses for that period. Fixed expenses include overhead, wages and other stable costs.
Don’t rely on your memory; collect your actual bills — and compare them to your bank statement. Then consider variable costs such as fuel and materials. You can’t predict exactly how these expenses will change, but you can chart them for a year to identify trends and establish averages.
Of course, you’ll also need to consider whether your materials usage will remain steady. If you expect significant changes in demand during the forecast period, adjust your variable cost estimates accordingly.
Approach your income forecast in the same way. Don’t try to guess what may come in. Instead, base your forecast on what you know is in the works. You can group like income, such as from sales or investment interest, but remember that much of your income is likely to lag 30 to 60 days or more behind the work you do to earn it and enter it accordingly. If you know you’ll ship an order in February for a customer whose terms are 60 days net, for example, you can’t realistically show income from that order until April.
Plot your course
When you’ve estimated all your expenses and income for a year (or a quarter, if that’s a better window for your company), enter them in monthly categories — such as utilities, labor, inventory, sales or taxes — to get a snapshot of what you’ll need and what you’ll receive each month. Seasonal fluctuations will be evident, as will any noteworthy trends, and you can plan adjustments in advance. After your forecast is in place, use it to measure your actual performance and see where adjustments are needed.
If you anticipated $300,000 revenue for September, but didn’t expect an order that will require $350,000 in expenses that month, for example, your cash flow forecast can help you decide how to make up the difference. If you’re going to need a short-term loan to tide you over, you’ll know that in time to get the financing in place.
See where you stand
Cash flow forecasts can be valuable business tools, but you must be honest with yourself. Don’t gloss over performance issues, and don’t use guesswork. Know exactly where you stand.
Find out how our M&D accountants can add value to your business. Email us or call us at 1 (888) 875-9770.
related links
Audit Assurance and Accounting
Contact Us
Call Us
