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Use Cash Forecasts to Plan 2021 | Supporting Strategies


How Today's Numbers Drive Business Decisions for Next Year


Note: This blog first appeared on the NCACPA website.

Ready for 2021? Insights into current cash flow are more important than ever for creating an accurate forecast.

If revenue was lower than anticipated at your business this year, you're not alone. But if you were among the fortunate ones whose business remained open or only had a brief disruption, you have an opportunity to regroup and get a fresh start next year. And it all starts with examining your current cash flow.

Understanding the Numbers
For any business to succeed, it must have enough cash available to pay expenses, bank loans, taxes and salaries and to purchase whatever inventory and equipment is necessary to function effectively. That's why the kind of disruption in cash flow that many businesses suffered this year has been so unsettling. Some organizations suddenly found themselves unable to pay their bills.

If you're in that category, now isn't the time to panic — that's never a good approach. But it is the time to apply a sense of urgency and figure out a way forward in this new financial reality.

Many business owners don't truly understand cash flow. Basically, it's the amount of money that's coming into your business in a given timeframe (typically a month), minus all expenses, including ongoing loans or credit card balances. Think of it this way: If you have just enough cash flow each month to pay the minimum amount due on your credit card, you can get by for a few months. Eventually, however, that approach will catch up with you.

That's where a trained bookkeeping professional can be invaluable. He or she can help determine not only the exact status of your cash flow today, but also how to adjust your cash-flow forecast to meet your obligations tomorrow.

Let's break it down.

Quarterly Projections — the 13-Week Cash Flow
The quarterly cash-flow forecast should be a regular gauge at every business, regardless of the circumstances. It's simply a responsible practice to monitor the amount of money flowing into your business versus the amount flowing out.

But creating the 13-week forecast is only half the battle. It's vital to then compare actual numbers to your projected figures. In normal times, it might be sufficient to conduct this comparison during the month-end close. At an unsettled time like this, though, you should make it a rolling 13-week forecast, meaning that you update it each week.

Six-to-Nine-Month Projections
Another benefit of the quarterly forecast is that it gives you a starting point for projecting even further into the future. Otherwise you'd simply be guessing.

Ultimately, the purpose of a cash-flow forecast is to reveal trends that enable you to create a financial roadmap for your business. If every indicator shows that you'll return to pre-COVID cash flow next year, or even exceed it, great.

But if all the indicators point toward a slower recovery, then you'll have to make 2021 business decisions that are in line with this reality. That can mean anything from laying off employees, to freezing any purchases that are not absolutely necessary, to borrowing funds. The point is to make sure every decision is an informed one, and long-term cash-flow forecasts are the best starting point.

Finding a Way Forward
Really, a cash-flow forecast isn't much different from a weather forecast. It's a matter of studying current patterns to determine if you're more likely to expect stormy weather or sunny skies in the near future. From there, you plan accordingly.

Sandra Finerghty


Sandra Finerghty

Sandra Finerghty, Managing Director of Supporting Strategies | Durham & Chapel Hill, NC, provides bookkeeping and controller services to growing businesses. She works with CFO partners to provide a complete bookkeeping and controller services solution for clients, enabling CFOs to focus on strategic consulting services.

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This website is created by Supporting Strategies to provide general bookkeeping and accounting information only. Supporting Strategies does not provide tax, legal or accounting advice, and the information contained herein is not intended to do so. As such, the information provided should not be used as a substitute for consultation with professional tax, legal, and accounting advisors, and you should consult with a tax, legal and accounting professional before engaging in any transaction.