Welcome to 8 Steps to Managing Your Money: A Business Owner’s Guide. You’ve landed on Step 1, Forecast Your Future, which has as much to do with sanity as it does strategy. To take control of your money situation, it’s critical to establish a fundamental understanding of how money flows in and flows out of your company. And that’s exactly what we intend to help you do.
Though the common term for this discipline is called cash flow “forecasting,” which you’d think would only help you peer into the financial future of your business, the fact is that cash flow forecasting helps you tune in to what’s happening this very week.
If you’re like most newbie entrepreneurs, you’re probably hearing a voice in the back of your head murmuring something like, “This is going to be dreadful. I hate the numbers.” Welcome to the club. Pretty much everyone feels that way until they learn how empowering knowing your numbers can be.
So try to run that voice out of your head. Being savvy about the math of your business will help you gain vision, creativity, clear options, the ability to make informed plans, and yes, peace of mind. Best of all, reckoning the reality of “the numbers” forces you to be sober about your business, providing balance to one of your greatest and most vital assets for success – your passion.
Now, let’s get to it.
Cash flow forecasting focuses on quantifying exactly how much money is coming in and going out of your business’ checking account each month. Below we start with cash coming in.
Cash In
Cash in = any and all money that you receive in a given month.
Start by listing out all inbound money that you anticipate receiving in the months ahead. This can include sales revenue, bank loans, an equity investment from your rich uncle, your personal financial contributions to the business – any form of money that flows into your business bank account.
Regarding sales revenue, be sure to take into account the timing of payments you expect to receive. For a business based on cash receipts (including credit card payments), this is an easy exercise because there’s virtually no lag time between the product or service you provide and payment you receive. When the transaction is complete, you are paid. End of story.
If your business is the kind that extends payment terms to customers, factor in a lag time of 30 days—sometimes as much as 90 days—before you’re paid. And to be conservative, if your terms state that payment is required in 30 days, you may want to play it safe and assume in your planning that it will actually take 45 days. This way, the variances in your forecast will fall only in the “pleasant surprise” category, not in the “uh oh, I can’t pay the bills this month” category.
During this exercise you might also want to ponder ways you can receive payments from customers more quickly. Can you ask for money up front or at least a portion of the payment? See Step 2: Rationalizing Your Revenue for more on this.