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  • Writer's pictureMatthew Dudek

Keep your cash flowing

A Cash-flow Forecast is something every business should be using on a monthly basis. It will help the business owner to keep track of all cash flows coming in and out of the business. This ensures that the owner is able to pay their liabilities and keep account of the cash needed to run the business. The easiest way to keep track of incoming and outgoing cash is using a cash-flow spreadsheet. There are three ways that you can use a cash-flow spreadsheet to help make valuable decisions.

  1. Estimate your cash-flow

  2. Track your actual cash-flow

  3. Stress Test

The following demonstrates how to create a cash-flow forecast.

  1. Estimate your cash-flow

Suppose we are starting up a new business and would like to forecast our cash flows for the next three months. We would set up a table like the one below. We start our business with $1000 cash in the bank.

We can see that we have a positive cash balance at the end of every month. Therefore we should have enough cash to pay for the expenses to run the business for at least the first three months.

  1. Track your actual cash-flow

Suppose we are at the end of Month One. We can now input our actual cash figures. We can see the actual cash flows in red. We have received less cash and paid more cash than we projected. We now need to update our start and end cash balances for the next two months. Since we have made less money in both sales and services than initially projected, we may reduce the figures for month two and three if we believe the sales and services to be less than initially forecast. The more past data we have then the more accurate our forecasts will be, this is why it is a good idea to continually update your forecasts as new information becomes available. We can see this demonstrated in the table below.

  1. Stress Test Finally we have the stress test. This is the third way that we can use cash-flow spreadsheets to help us prepare for unforeseen circumstances. We can stress test our business by thinking about all possible future scenarios which could impact our cash flows. This could be either an increase in expenses or a drop in revenues. We can add these scenarios to our cash-flow spreadsheet so that we can prepare in case the scenarios become a reality. The best method is to be conservative with your projections to increase your chances of being able to pay all of your expenses.

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