A well-managed cash flow forecast tells you whether or not you have the money to continue to grow. If you see that the money’s not there, knowing this will give you time and options to develop a plan well in advance. The big difference between a cash flow forecast and all other statements is that it will provide a forward look at your operations and provides the framework for making decisions about when you can and cannot spend your precious cash. Instead of looking in the rear view mirror, you will be looking through a telescope that allows you to see what’s ahead.
In addition, using a cash flow forecast will enhance your versatility and allow you to adjust your planning as your business grows. The key is that a cash flow forecast is a working document. It is like planning a car trip. If you map it out and you know that one tank of gas will not get you there, you can plan to stop along the way to refuel—you wouldn’t keep driving until you ran out of gas!
You can and should update your forecast weekly. When you are making decisions about what to spend money on, you can see how it will affect your bottom line. Any big expense should be factored in immediately before deciding to spend your hard earned cash. Here are some things to consider when you build your cash flow forecast sheet.
How much is coming in
Do you accept monthly payments? If the answer is yes, you can determine how much you will make each month. If not, you will have a lump sum of money that you will need to carefully manage so that it lasts for your entire season. In any event, you will want to create a monthly chart so you know where you are at the end of each month.
How much is going out
This part is bit more elaborate. You will need to identify your expenses so you can see what is a necessity and what is not. Things like rent, utilities, teacher pay and marketing are necessities. Most of these are fixed expenses, so you will know what and how much is needed for each month. You can and should budget x amount for marketing, and most utility companies will create a payment plan where you pay x amount each month. (If you are not on a fixed payment plan I recommend you call your service providers and ask them to put you on one.) Your last entry on the expenses will need to be 'Other'—this is where you can add any unexpected or additional expenses you encounter during the month like repairs, supplies or added advertising.
Here is an example of how it works
This is a simple illustration of how your cash flow forecaster will work
September
Beginning cash balance
$25,000.00
Cash to be collected (For studios who accept monthly payments)
$15,000.00
Cash Spent
Wages
$5,000.00
Rent
$4,000.00
Utilities
$2,000.00
Marketing
$1,000.00
Other
$1,500.00
Total
$13,500.00
Ending Cash Balance
$26,500.00
Now repeat the process for every month thereafter. This is a simple and easy way to see where you are and where you will be at the end of the year. As I said earlier, this is a working document. You will need to adjust as you go along. Life isn’t always easy and unexpected expenses do and will crop up. You might also plan to factor in some larger marketing expenses that can help you grow your business.
The above example shows you in a profitable position. If you are in a negative position you can decide what you can cut. It may be that you need to have less staff or to streamline your marketing plan. You may need to renegotiate your lease. The good news is you know beforehand and you can sit down and figure out how you can bootstrap your expenses or find ways to increase your income. I recommend that if you are in the red (a negative position) that you find ways to do both.
This forward looking document will make your life easier in the end and give you the peace of mind that the road trip you are on is well planned out and you will get to your final destination in good shape.
