The cash flow statement is an essential tool for business owners and anyone considering business ownership. Unlike the balance sheet or income statement, which show what’s already happened, the cash flow statement is a forecasting tool. It projects future income and expenses over a specific period, helping you see what’s coming down the line.
A typical cash flow forecast is broken down by month and often extends for one or more years. For example, if you’re applying for a commercial loan, the lender will typically request a 24-month forecast.
A solid cash flow statement does three important things:
- Demonstrates the profit potential of your business
- Highlights the seasonal nature of your revenue
- Shows when you might face cash shortages
When Should You Develop a Cash Flow Forecast?
As a business owner, it’s critical to create a cash flow forecast before making major decisions like:
- Starting a new business
- Applying for a business loan
- Changing locations (whether moving from a home office to a rental or expanding to a larger space)
- Hiring additional employees
- Opening a second location
- Introducing new products or services
How to Develop Your Cash Flow Forecast
To create your cash flow forecast, follow these steps:
- Identify Your Revenue Streams:
List out all the ways your business makes money. This could include retail sales, consulting services, wholesale accounts, etc. - Estimate Monthly Revenue for Each Stream:
- What does the “average” customer spend?
- How often will purchases be made? Retail sales might happen daily, but consulting services could be more occasional and of a higher value.
- How will customers pay? Retail transactions are typically paid upfront, but wholesale or service-based businesses may bill customers and expect payment within a set number of days. Make sure to include the revenue in the month you expect to receive payment.
- Account for Seasonality:
Some industries see fluctuating revenue throughout the year. For example, retail tends to be slower in the first quarter and peaks in the last quarter. Be sure to include this in your forecast. - Estimate Your Costs:
- Cost of Goods Sold (COGS): How much does it cost to produce or acquire the goods/services you sell?
- Operating Expenses: Fixed expenses (rent, salaries, insurance), Variable expenses (utilities, marketing, supplies), and Occasional expenses (licenses, subscriptions, property taxes)
- Non-Operating Costs: These include investments in new equipment, furniture, building improvements, utility deposits, and loan payments.
- Include Your Owner’s Draw:
Your own payment, called the Owner’s Draw, should be listed at the bottom of your cash flow statement to show that you’re paid after all bills are covered.
Cash Flow vs. Income Statement
The cash flow statement and income statement are different in a few key ways:
- Loan Payments: The cash flow statement includes the entire loan payment (both principal and interest). The income statement, however, only includes the interest portion of the loan, as that’s the amount that’s tax-deductible.
- Depreciation: While depreciation affects your income statement by reducing taxable income, it doesn’t appear on the cash flow statement because it doesn’t involve an actual cash outflow.
Why Accurate Estimates Matter
It’s essential to estimate revenues and expenses as accurately as possible. Your cash flow forecast will help you decide whether to start or expand your business, assist lenders in evaluating your loan application, and highlight any months where your revenues might fall short of covering expenses. By recognizing potential cash shortfalls ahead of time, you can make a plan to cover those gaps—whether by borrowing, saving during busier months, or investing your own funds.
Get Started with Your Own Cash Flow Statement
I’ve included a cash flow statement template to help you create your own forecast. If you’d like an editable version of the worksheet, just email me at susan.ball5@aol.com, and I’ll send you a copy.
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