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I have a Budget - Why do I need a Cash Flow Forecast?


By Dave Costello, TCV Growth Partner-


As an entrepreneur or leader of a small company is this what you are thinking? I hear you! You diligently put together a budget and now your outsourced CFO is telling you “WE NEED A CASH FLOW FORECAST!” Let me talk about some of the reasons why you might want one, and show that having one provides much more comfort than not having one.


The budget for revenues represents the period in which you expect to record revenue as income in your accounting records. If you are on an accrual method for accounting, this means you record revenue when you send the bill to the customer and set up an "accounts receivable" that represents what that customer is expected to pay you. The question is WHEN will they pay you? Will it be in 30 days, 60days, 90 days or beyond? This is where a Cash Flow Forecast will come in handy; or maybe is a real necessity. Very few businesses require cash up front from a customer.


Your budget may reflect revenues of $60,000 in a month with payroll of $35,000 for the month resulting in a net income of $25,000 ($60k in revenue minus $35k in payroll) if these are the only two items in the budget. The payroll number is constant if you have permanent staff although it could fluctuate with small variances month to month. The revenue number may be constant as well, but will you collect from your customers in the same month you bill? Not likely! This is why you need a Cash Flow Forecast.


Suppose you billed $60,000 a month and of that you collected $15,000 in the next month, $35,000 in the second month, and $10,000 in the third month following billing. Let’s assume this pattern is typical of your collections experience. Here’s what your cash flow may look like:

So the question becomes, do you have $55,000 in cash on hand to finance the payrolls you are expected to meet until your accounts receivable collections start to come in in amounts that are sufficient to cover your payroll expenses? Does this number of $55,000 surprise you?


Yes, you are starting to show excess cash flow in March, but you still spent $35,000 in January and $20,000 in February because your cash flow didn’t cover your payroll expenses, and you only got back $15,000 in March. When do you break even? You begin to show excess cash flow in March, so can you finance the business until then? You don’t show positive cumulative cash flow until May.


You also will have to consider if you are going to need to buy any equipment or inventory that will be a cash outflow. Sure, you can string out vendors for 30 to 45 days, but is that going to be enough time for you? A cash flow forecast can help you estimate this answer more scientifically than looking at your cash balance every day can.

And if you are one of the lucky ones that bill customers before you start work? That’s great, but it still takes time to collect after you send a bill. I’m guessing you will start work on the customer project before receiving the first dollar that you billed that customer. This practice certainly helps, but it doesn’t guarantee your customer is going to pay in 30 days, and you still should have a cash flow forecast.


How do you manage cash if cash in the bank is at a minimal level? One way would be to seek a bank line of credit. If the business is relatively new, this may really be a home equity line of credit with your house pledged as collateral. After some time, and after the business cash flows are steady and reliable, you may be able to convert this to a loan to the company using your accounts receivable as collateral. Some entrepreneurs are willing to use their homes as collateral, some aren’t. The bank is certainly going to want something though.


Does this make sense? Do you have a cash flow forecast for your business? I can tell you that you will sleep better at night if you have one. It will never be a perfect forecast, but it is a great tool for you to use to help manage your business.


Need help getting a cash flow forecast prepared? Reach out to TCV Growth Partners for a conversation about how to get started. You can reach me at dave@techcomventures.com and you can also contact us through our website, www.techcomventures.com.

Happy New Year! Wishing you much success with your business in 2022!



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