One of the most important elements of running a business is managing available cash to keep your business going. As a business owner, you likely have a good idea of available funds in your operating account at any time.

While it is important to know what funds you can easily access, planning is often an overlooked responsibility for many business owners. Forecasting future cash flow is as important as managing available cash. Looking ahead helps reduce your business risk and allows you more time to make decisions should forecasted cash flow highlight deficits.

Ways to forecast future cash flow and create a safety net

At LCW CPAs, we use two main ways to forecast your future cash flow. The first method is what questions to ask yourself as a business owner and the second is the calculations of future cash flow. By determining your businesses future cash flow, you can then create a safety net. This safety net can be an average of the last three months of expenses, or maybe an average of your busiest three months if your business is seasonal. Whether you own a restaurant or a plumbing business, LCW CPAs works to help your business be prepared through any potential hardship by creating a safety net together.

Method 1

If your business was not generating any revenue, how long could you continue to cover expenses? Some questions you might ask yourself:

• At what point will my cash run out? How many weeks or months of cash do I have?
• Do I have a line of credit that I can tap into if needed?
• Do I have other loans or sources of funds to tap into in case of emergency?
• What expenses could I eliminate without hurting the business, if needed?

Method 2

When planning your business safety net, one method is to define the cash you need to operate for a minimum of three months and set that money aside as your safety net. Review your bank statements and average accounts receivable and accounts payable balances. Calculate an average cash flow using these statements and also consider seasonality. The average should be representative of your business cycle as a rule of thumb.

For more information about useful reports, read our recent blog five key reports to manage your business where we break down what a business owner needs to know to run a financially healthy business.

Conclusion – defining your safety net

As a business owner, looking ahead is one of your greatest assets. By taking time to understand your financials alongside LCW CPAs, we can put you at ease not only for today but for your business going forward. Set aside available funds in an account as your safety net. If you have questions or concerns about how to do this, contact us. We are here to help our clients plan and manage their business for good times and through hard times.