Cash Flow Forecasting: See Your Money’s Future

Cash flow forecasting is one of the financial management moves that can turn the tide for an organization. As compared to a normal budget, cash flow forecasting shows when money flows in and out of the business. The timing issue is what gives rise to most cash challenges.

Why Forecasting Beats Budgeting

The budget will show you whether you are saving more than spending during the month. This is useful information; but there is one crucial aspect that is being missed out here – the deadline factor. There are some payments that you need to make at specific times, much before you receive the next paycheck. While you may be getting your salary on the 15th of each month, if you have to make your rent payment on the first, there would definitely be a time gap.

Step One: List Income for Accurate Cash Flow Forecasting

All sources of funds coming into your life should be identified. These include the main income, freelance income, additional job income, alimony, and dividends/interest on investments. The exact date on which each of these funds was deposited should be identified and not estimates. In case of income earned from one-time sources such as commissions, a conservative estimate of the minimum income received during the past six months should be taken into consideration. The conservative approach is normally advised by financial experts since it allows for cushioning.

Step Two: Track All Expenses in Your Cash Flow Forecasting

Next, list every single outgoing expense, whether it is a fixed cost or a variable one. Rent/mortgage payments, car payments, insurance, and subscription services are examples of fixed costs. Variable costs consist of food, going out, gasoline, entertainment, and clothes. But don’t leave it at that. You should also include expenses that occur quarterly such as property tax, auto registrations, car insurance, and irregular home/car maintenance costs. This is something that is often forgotten while making budgets but the main cause of inaccuracies.

Step Three: Build a Daily Timeline with Cash Flow Forecasting

Use a spread sheet, an application program designed for this purpose, or even pen and paper, whichever suits you best. Begin with your bank balance today. Every day after that, enter all income transactions as well as all expenses on their respective dates. Determine your cash balance at the end of each day. You will then have a timeline showing you where your lowest balance occurs. You may find out that while your balance is just $50 on the 12th, it ends up being $500 by the end of the month.

Step Four: Fix Shortfalls Using Cash Flow Forecasting Insights

In case you get a negative balance on any particular day, there is still enough time for you to do something about it. You may ask for a change of the payment deadline for any bills that need to be paid, reduce your variable expenses or use some savings in order to cover those expenses. Thus, you will not have to pay any additional fees or suffer because of that situation.

A Real-Life Scenario

Take the case of Maria, a graphic designer, whose salary of $2,800 comes twice a month on the 10th and 25th. She is supposed to pay rent of $1,200 on the 1st of the month. Analyzing her budget forecast on the 28th of the preceding month, she realizes that she only has $900 in her current account. By simple calculation, it leaves a deficit of $300 on the 1st. Rather than being overwhelmed, she contacts her landlord and asks for a grace period of five days. Payment is received on the 10th without any extra charges.

Benefits You Will Notice Quickly

In only three months of continuous forecasting, a pattern is established. It becomes very clear how often you have extra money lying around in your checking account, and you can use it to your advantage by transferring it to your savings account or investing it into your retirement fund or even using it to settle your high-interest debt. Overdrafts come as no surprise anymore. In addition, there is now psychological relief knowing how much cash you have for the next 30 days.

Common Errors to Avoid

Always remember to revise your forecast if there is any change in income or new expenses are added. Life itself is changing, and hence your forecast should be too. Moreover, never assume anything about the variable expenses; always calculate their average from the last three months of your banking transactions. Over-optimistic forecast is usually incorrect; hence always take your expenses up and income down.

Tools to Simplify the Process

A variety of templates can be found on the internet which are free and include pre-loaded formulas that automatically calculate daily balances. There are also other apps available like YNAB (You Need a Budget) and PocketGuard which allow you to forecast along with managing transactions. Just select the tool according to your daily practice.

Start Today and Reap the Rewards

Cash flow budgeting takes less than 30 minutes a month when you have set up the template. This is a tiny investment, but one that will give you great returns in the form of fee reductions, better interest rates, and lower levels of stress. Financial stress will decrease significantly because guesswork will become clarity. Start right away. Launch your bank app, pick up a calendar, and plan out your next 30 days. You will be amazed at what you have been missing out on all this time.