A projection for the future that considers all the data of your current financial status to tell you where you're headed. A weather forecast tells you what to expect outside. A financial forecast tells you what to expect from inside your business.
A healthy bank balance today can create a false sense of security. Payroll, taxes, loan payments, vendor bills, insurance, and other expenses may already be committed. All these are items that already appear on your bank balance and basically a thing of the past once they process. Your bank balance doesn't tell you what’s coming. This is the importance of a cash flow forecast. A projection for the future that considers all the data of your current financial status to tell you where you're headed. A weather forecast tells you what to expect outside. A financial forecast tells you what to expect from inside your business. Cash in the bank tells you where you are. A cash flow forecast tells you where you're going.
What Is a 90-Day Cash Flow Forecast?
A 90-day cash flow forecast estimates the cash expected to come into and leave the business over the next three months.
It should include:
The One Number Owners Should Know: Projected Lowest Cash Balance
Although many items are needed for a cash flow forecast, there’s one number that stands out more than any other. Within a financial forecast, the projected lowest cash balance is the minimum amount of money a business can hold at its lowest or tightest point of a forecast period.
Rather than just asking, "How much cash do we have?", ask, "What is the lowest our cash balance is projected to reach over the next 90 days?"
For example:
Cash today: $125,000
Projected cash in 30 days: $94,000
Projected cash in 60 days: $61,000
Projected cash in 90 days: $37,000
In our example, the business technically has $125,000 today but the more important management number may be $37,000. That $37k is the lowest amount of money the business could have without any problems. The importance of this number is created from all of your items we listed before. Thus meaning, when the business is at its tightest point, whether it be a slow time of year or competition is growing, the lowest number you can efficiently work with is that $37,000.
Now let’s get into some ways to identify your numbers of your business. Plus some ways to adjust your financials to keep up with your new projected lowest cash balance.
A forecast gives owners time to act. When you begin to break down what your business is actually doing financially, you can create a process to help you stay far from it. If cash is projected to get tight 60 days from now, you might increase your invoices, postpone a purchase, reduce discretionary spending, adjust hiring, negotiate vendor terms, secure a line of credit, or increase sales efforts. Basically anything to keep as much money as you can and possibly increase the money you bring in. Having that knowledge of your numbers helps you know what should be coming and going. Therefore when anything outside of that occurs it’s not too bad of a surprise. The earlier you see the problem, the more options you have.
Revenue doesn't automatically equal cash. The money is yours when it clears the bank. If you invoice $100,000 this month but customers don't pay for 45–60 days, that revenue can't necessarily fund this month's payroll. This is why the forecast should be based on expected collection dates, not simply sales. Sales shows you that the work is completed. Cash in the back is the true marker of what you’re working with. Your decisions are based upon what you are actually doing, not what you’re expecting.
This is where businesses can get caught off guard. When there are large enough gaps between payments, we tend to forget about them. That’s when surprises happen and surprises aren’t good in business. Unless it’s a party for doing so well. When you’re doing your forecasting, include quarterly taxes, annual insurance premiums, bonuses, equipment purchases, large inventory orders, software renewals, professional fees and seasonal expenses. Yes, it’s a lot to look after. This is what makes the forecast so important. You want to know everything that is coming up within this 90 day span. A business may appear cash-flow positive during normal months but struggle when several large obligations hit simultaneously. Don’t allow yourself to be caught off guard by a big purchase, learn your numbers and know what’s next.
Once owners can see their projected cash, they can establish a cash floor, this being the minimum amount of cash they're comfortable allowing the business to reach.
For example, let’s say your minimum operating cash target is $75,000. If the forecast shows cash dropping to $52,000, you now know action needs to be taken before the balance reaches that level. When you establish a baseline, it’s best that you take it seriously to avoid problems in your business.
Don't only forecast what you expect to happen. We mentioned how unexpected items hit your bank account often. Instead of the expected, ask more questions. What if revenue drops 10%? What if our largest customer pays 30 days late? What if payroll increases 10%? What if we unexpectedly need $25,000? From here, you can then recalculate the lowest projected cash balance.
You could present three scenarios:
| Scenario | Lowest 90-Day Cash |
| Expected | $92,000 |
| Moderate Stress | $61,000 |
| Severe Stress | $24,000 |
With this cash flow stress test, you can see the company's cash resilience, not just its current cash.
A 90-day forecast shouldn't be something an owner creates once and files away. Each month you should be checking in. As you check on your finances regularly, actual results begin to replace projections, your previous assumptions are updated with actual data, and you can look forward to the next month. As an owner you understand the importance of checking your inventory and processes. Checking in every month creates a rolling 90-day cash flow forecast. Over time, you simply get much better at predicting cash needs.
Forecasting isn't only about spreadsheets. It's about answering questions like: Can we afford to hire? Can we purchase equipment? Can the owner take a distribution? Can we afford to lose a major customer? Do we need financing? Can we invest in marketing? Are we generating enough cash to support growth? All these questions are answered by the forecast. Once the forecast has been created and run, you want to make decisions and execute with precision. No need for a forecast, if you are not going to act on the data.
The ABS takeaway
In closing, profit tells you whether the business is making money. Cash flow tells you whether the business can keep operating. A 90-day cash flow forecast gives you something even more valuable… the ability to see potential problems before they reach your bank account.
