Cash Forecast vs. Cash Flow vs. Cash Management– Good Tools

Most people think that cash management, cash flow, and cash forecast are the same - they are not. If you don’t know the difference, you may have a false sense of security about where you are and the progress you are making.

Even if you do know the differences between the three, you also need to know how to use them to run your business.

I’ll give you a rundown of each one, what they are used for, and some key ideas for using them to run your business.

What is a “Cash Forecast” and What is It Good For?

A cash forecast is a way to predict when cash is coming in and going out, based on your business model. I like to call this “business modeling” because it creates a sense of how your business is run. Sometimes it is also called “cash modeling.”

A cash forecast is also a predictive model of your cash-based profit and loss statement.

Cash forecasts are usually set-up for monthly calculations, which go out 1-3 years. They use cash-basis accounting, and have estimates of your revenue, cost of goods sold, and expenses.

Why do you want to use a Cash Forecast?

You use a cash forecast to predict:

1. The change in cash profit when you implement changes to your business, such as:

• A price Increase or decrease
• Adding or decreasing headcount
• Borrowing money
• impact on cost, revenue, and/or productivity and output

1. The accumulation or decline in cash balances in your bank accounts
2. Potential cash shortfalls

They are also very helpful to understand what will happen to your bank balances when you have one-time large cash expenses, such as:

• Large travel or marketing expenses
• Balloon payments
• Tax payments
• Capital equipment expenditures
• Materials to fulfill an exceptionally large order

Helpful hints for setting up Cash Forecasts

• Excel or Google Sheets are both good tools for cash forecast models.
• Think about what you are trying to accomplish. If your primary focus is on a complete predictive business model, then you will probably need to create your own. If you want to predict “How much cash will I have at the end of the month?” a template may work for you.
• You can find free online cash forecast models by searching “cash forecast template.” This is an easy way to find simple or complex cash forecasts that you can customize for your business.
• Your first forecast is a rough estimate.

1. Go back and review your results after the month is over.
2. Were you close to predicting the results? If you were, great! If not, look at where your misses were and adjust.
3. Go back to step #1 and “get it right” for at least 2-3 months before you stop reviewing for adjustments regularly

Observations and cautions about Cash Forecasts

• Cash forecasts do not help you actively manage your cash. They can be good predictors of future events; but will not do a good job helping you make day-to-day decisions.
• Cash forecasts are great “big picture” tools. Business owners and CFO’s will want to use them.
• Your bookkeeping can be used for historic cash records.

What is “Cash Flow” and What is it Good For?

This is a term that is talked about constantly, for all sorts of different reasons, with differing definitions. Some of the common uses for “cash flow”:

• Classic Definition: The amount of cash generated, or used, by a company during a specific time period, typically a month, quarter, or year. Cash flow measures how much the balance in the company’s bank accounts go up or down
• Real Estate: The difference between the monthly revenue from a property and the estimated monthly costs. Widely used in the residential real estate investment community.
• Accounting: The Statement of Cash Flows is a method of accounting for cash if you use accrual-basis accounting
• Common Usage: Urbandictionary.com defines cash flow as a “term that refers to the amount of cash being received.” This is the definition that is being used more and more. How much is coming in, but not how much is staying.

With all these common uses for the word cash flow I am always careful to identify the exact definition of cash flow that I’m talking about. Here, I’m going to talk about the classic definition: What is the increase, or decrease, in cash for a business over time.

When I say “over time” that could mean this week, last month, or last year; for the following examples, I’m using a month.

If your bank balance was $5,000 on July 1 and $7,200 on July 31, then you cash flow was $2,200 during July. If the bank balance started at $7,200 on August 1 and ended at $6,200 then your August cash flow was ($1,000) or -$1,000 or negative $1,000. (All mean the same, but different people write it differently.)

You can get your historic cash flow from your accounting software. You can estimate your future cash flow using your Cash Forecast.

Why is understanding your cash flow important?

• You should know if you are adding cash to the company or reducing it.
• When you see a long-term pattern of cash leaving the company you should probably make changes to your business model. Few companies survive for very long when the money is constantly being drained from the bank account.
• Not only is knowing if money is coming in or going out important, but how quickly as well. Are you keeping less every month, or keeping more?

1. If you are keeping more, you may be able to invest in additional resources to grow your business or pay bonuses to keep people happy or put money aside for a future need.
2. If you are keeping less each month, then you can make changes before your positive cash flow becomes negative. It’s like an early-warning signal.
3. If your negative cash flow is increasing, then the urgency to make changes grows.
4. If your negative cash flow is getting smaller, then you are on the right track

Helpful hints for setting up Cash Flow Models

• Here’s the best news: If you set-up a Cash Forecast Model, then you already have your Cash Flow Forecast Model. You simply find the difference between one period and the next, and there are your cash flow forecast numbers.
• Most Excel or Google Sheets online models that are cash forecast models are called cash flow models, so look for the spreadsheets that contain both.
• Setting up a graph that shows you the increasing and decreasing trend of your cash can help identify future problems and opportunities. A trend over time is generally more important than any single week or month.

Observations and cautions about cash flow numbers

• Cash flow does not equal profitability. Let me repeat: Cash flow does not equal profitability.

1. From a tax perspective: You may have non-tax-deductible expenses that, when removed, could show a profit to the tax man.
2. If you use accrual-based accounting, then many expenses could be delayed from a profit & loss statement.

• If you are using cash-based accounting and have negative long-term cash flow, then yes, you are losing money. But in the short run, sometimes increasing sales requires cash outlays and the profits follow. This is especially true if you have inventory or other up-front costs and bill your customers who pay in 15 or 30 days.

What is “Cash Management” and What is it Good For?

The “David Safeer” definition of Cash Management is making informed decisions and acting on:

1. When and how cash comes into the company
2. What to do with the cash when it’s in the company
3. Who to pay first and when best to pay them

Many business owners spend very little time thinking about these three concepts. They don’t realize that they can:

• Influence when cash comes in
• Increase their profits by putting their cash to work
• Control when and how bills are paid to their advantage

Cash management will:

• Get money in when you want it
• Optimize profits
• Put you in control of when vendors are paid and how much

The bottom line: When you manage your cash, you sleep better at night.

Why is being able to manage your cash important?

If you have way more cash than you need and you don’t want to worry about profitability, then don’t think twice about cash management. 

If you are tight on cash and/or want to be more profitable, then cash management will help you get paid when you want to, maximize profits using your cash when you have it, and deal with vendors better.

When done right, cash management also involves many parts of the company. In addition to the business owner and CFO or controller, good cash management also involves:

• Product management
• Marketing
• Purchasing
• Accounts receivable
• Accounts payable
• Bookkeeping
• Inventory
• Operations
• Sales

With the entire company focusing on their part of managing the cash, the owner/president/CEO can focus more on growing the business and making it a better company.

Helpful hints for setting up Cash Management Tools

Cash management tools can deal with any part of the company. In addition to tools like specialized software, systems and processes are part of good cash management. I’ll talk about other tools, processes, and resources in a separate article.

The most powerful tool is a cash management spreadsheet which:

• Uses output from QuickBooks or other accounting software to automatically create the scheduled dates of money moving in and out of the company
• Tracks accounts receivable, accounts payable, and regular expenses
• Uses your starting bank balance, then projects cash based on planned income and expenses
• Allows you to push payment to vendors into the future when needed and pull payments from customers in when they commit to payments
• Automatically rolls data forward each week

I use a spreadsheet like this with my clients. It’s powerful and takes a little bit of training. Once it is implemented, every client is able to take control of the basic cash movement into or out of the company and in turn they improve both their cash management and cash flow within just a few days.

Observations and cautions about Cash Management

Cash management:

• Can create business breakthroughs for almost every company.
• Is for anyone in the company who has any impact on revenue or expenses, which means just about everyone.
• Takes effort, but the results generally outweigh the time and energy in a very short period.

Cash Forecast vs. Cash flow vs Cash Management – Which Is Right for You?

Trick question!

All three are good tools for a well-run company, you should probably use them all.

  Have you implemented any of these tools? I’m especially interested to learn about new cash management tools- software, systems, and processes.

Is there a topic you’d like to learn about? Contact me at [email protected] to introduce yourself, share ideas, or ask me questions about managing your business’s cash.

David Safeer helps businesses implement cash management systems that create business breakthroughs. He founded The Cash Management Project in November 2018, to help businesses manage and maximize their cash resources.  David writes, teaches, and works with diverse companies around the world.

Thinking globally, one business at a time.

©2018-2019 David Safeer International