Understanding Your Cash

“Pathway to €5k Profit”  –  Reviewing your work  (3 of 5)

Those of you that have heard me speak or attended any of my webinars will know that I am a huge fan of keeping track of your cash. The number 1 thing you can do for your business today is to create a cash forecast.  Simply put, this is a cash budget or a cash plan. It is a plan for you to achieve your business goals over a specific length of time.

While you may have survived up to now without one, for your business to grow, you must, start now.  A cash forecast can help prepare you for seasonal fluctuations in cash and get you organised to take advantage of discounts or ‘sales’ from suppliers.

Your cash position determines how quickly you can pay your suppliers, how the bank will respond to a loan request, how fast your company can grow and how profitable it will be.

Starting out…

When you create your first cash forecast you will have to make estimates (or best guess) about how much money you expect in and how much money you expect to go out.  Looking back over what you have sold in the past is a good place to start.  Use your intuition and your knowledge of the market you are working in to plan sales for the next few months.   The more time you spend on these forecasts the more comfortable you will come in forecasting. These estimates must be realistic and yet contain a dose of creativity and optimism.

Why Prepare a Cash Budget?

A cash budget is important for a variety of reasons. For one, it allows you to make management decisions regarding your cash position (or cash balance). Without the type of monitoring imposed by the budgeting process, you may be unaware of the cycle of cash through your business. At the end of a year or a quarterly cycle, a series of monthly cash budgets will show you just how much cash is coming into your company and the way it is being used. Seasonal fluctuations will be made clear.

A cash forecast also allows you to evaluate and plan for your capital needs. The cash forecast will help you assess whether there are periods during your operations cycle when you might need short-term borrowing. It will also help you assess any long-term borrowing needs. Basically, a cash forecast is a planning tool for management decisions.


When starting your first forecast, there are four main components necessary for creating a cash forecast.

They are:

  • Sales – Money coming in
  • Purchases – Money going out
  • Desired outcome (cash balance)
  • Length of time

Sales – Money coming in

The fundamental concept of a cash forecast is estimating all future cash receipts that will take place during the time period. The most important estimate you will make, however, is an estimate of sales. Once this is decided, the rest of the cash budget can fall into place.

If you want to increase your sales by 10% this year, which months do you you will be able to improve sales in.  Which months will be quiet?  Are there natural breaks for your business, i.e. when the schools are closed. All of this needs to be factored in.

Purchases – Money going out

If an increase in sales of, for example, 10 percent, is achieved, various other costs will be affected.  Raw materials, stock and the costs of transport, if you have a product, must be revised to reflect the increase in sales. Also, how will this increase affect your overheads? Advertising, or administrative expenses?  Will you need additional support from assistants or marketing experts?  Will you need to hire more help? Look back over the past year or so and see what happened when sales went up? what happened when sales went down?

Each type of expense (you can use your bank statement as a guide) must be evaluated for its potential to increase or decrease. Your estimates should be based on your experience running your business and on your goals for your business over the time frame for which the budget is being created. At a minimum, the following categories of expected cash receipts and expected cash payments should be considered:

Cash Balance

The amount of cash you wish to keep in the bank will depend on the nature of your business.  The more predictable your customers and suppliers are, the more like you are to know how much you need.  The more fast paced your market is the more cash you may need.  You may want to consider your cash balance in terms of a certain number of days’ sales. Your budgeting process will help you to determine if, at the end of the period, you have an adequate cash in the bank to meet your upcoming needs.

Length of Time

How long do you want to plan for? That is, are you preparing a forecast for the next three months, six months, twelve months or some other period? Normally, I advise to have a 12 month forecast with an in depth 3-month plan and more loose the further away.  If you are looking to buy a big purchase, you will need to know when you will be able to do this.

And remember …

Keep reviewing

The more you look at your cash forecast the more you will start to see patterns.

You will start to understand the cash flow in your business, which is unique in every business.  I get my clients to fill in the actual numbers each month so you can compare what you planned to do against what you actually did do.

For a step by step guide click here.

Creating a routine

You are more likely to keep on top of your bookkeeping and understand the numbers if you put aside a bit of time each week to do your paperwork.  If you can make it the same time each week, you are more likely to form a habit.

The more you do your cash forecasting the more likely you are to see patterns and trends in your business. This helps you make better decisions.

This is why I have created #FinanceFriday coffee morning in my Facebook group.

Ideally spend 30 minutes on your accounts from 10.30 – 11.00 and then join me (details below) for a coffee and a chat.  I love getting feedback and questions so if you are having any issues, #FinanceFriday is the best place to catch me.


As always I am happy to help, so get in touch:

Grab a FREE 15 minute consultation here

Join my Facebook Group  here or

Sign up to me email list (below) and make sure you never miss an update again.

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If you have questions or comments, I’d love your feed back, contact me here.

I hope you are living your best life.

Till next time.



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