Where are you going to be in a couple months? If you're imagining yourself relaxing on a beach, you're not alone, but we're talking about finances here! What's your company's cash position going to be by the end of the year?

Summer School - cash flow

If you don't know, it might be time to brush up on your financial forecasting. Forecasting helps you gain insight into your financial future so you can help avoid any nasty surprises for your business.

1. Understand Cash Flow

Cash is king when you're running a small business. Making a profit on paper is fantastic, but you need actual money coming in to pay your staff, your bills and yourself. Sometimes there can be a delay between when you make a sale and when you actually get paid, which means your cash balance can go down even if you're making a profit.

Cash flow forecasting helps predict how much money you will have in the future based on your expected sales, timing of payments and outflows for bills, salaries and other expenses.

2. Predict Future Sales

To figure out your future cash flow, you need to predict your upcoming sales. While this is impossible to get exactly right (unless you have a crystal ball), just use your best estimate for financial forecasting.

If you have results from last year, these can be a good starting point. These can give you a good ballpark figure for what you can hope to earn each month going forward. Make sure to adjust for factors like seasonal trends. For example, is the summer an especially busy or slow stretch for your business? It's also important to factor in how much business has picked up or slowed down in the past year.

If your business is still new and doesn't have any historical data, try to estimate your future sales by looking at competitor data and averages for your industry. Either way, put down your best sales estimate for every month for the rest of the year.

3. Consider Payment Terms

You can't always count a sale toward inflow the minute it comes in. It depends on the payment terms. If you run a retail business where you always get paid at the point of sale, then, yes, your sales immediately equal incoming cash.

However, if you give clients time to pay, like a 30-day payment window, make sure to account for that. Sales you make at the end of the month might not turn into cash until the following month. For cash flow forecasting, you want to predict the amount of money coming in each month, not just the outright sales.

4. Subtract Cash Paid Out

Once you know your projected incoming cash for a given month, you need to subtract all the cash paid out for business expenses, salaries, loan payments and anything else that costs money. Subtract your cash outflows from your inflows. If you're left with a positive number, your cash balance is projected to grow for the month. If it's negative, your business is projected to lose cash for the month.

5. Forecast With Excel

Excel can be a big help when it comes to tracking finances. You can write down your estimates for each month and track how your cash balance will change throughout the year. If you don't feel confident designing your own template, the nonprofit association SCORE offers one for free. Just enter the information for your cash inflows and outflows, and the template will predict your cash balance for each month.

It's hard to relax when you don't know what the future will bring. Having a better idea of where your business will be financially later in the year can help you enjoy a little more peace of mind this summer.

Come back next Wednesday for another installment in our Summer School series, and take our course on website metrics where we'll cover what you need to know to help you maximize your website's effectiveness. See you then!

Tags: finance Business Strategy Summer School