Go Beyond The Operating Cash Flow Formula

Forecasting your operating cash flow can help your business tremendously. There’s a simple formula, but you’ll want to customize it to work best for you.

Strong cash flow ensures a smooth-running business. Hoping for the best—or banking on your current revenue—aren’t good financial strategies. Relying solely on current revenue streams can leave your business vulnerable to market disruptions. Use what you know–combined with expert financial advisory support–to create reliable forecasts.

Even well-established, profitable businesses can still have fluctuating cash flow. Economic uncertainties and supply chain disruptions can make cash flow management more critical than ever. Knowing how much cash you expect to have on hand and when allows you to:

• Pay your bills on time and maintain vendor relationships
• Plan for new expenses, large and small
• Accrue resources for paying taxes or building your capital reserve
• Identify patterns that can help improve future forecasting and business planning

A Simple Cash Flow Formula 

A formula to calculate your operating cash flow can be as simple as this:

Operating cash flow = total revenue – expenses (over a given time)

However, your business might have more complex needs. This is where accounting advisors come in. 

There are several methods you can use, but the receipts and disbursements approach is simple and easy to follow using these four steps:

Establish your timeframe: Financial advisors recommend rolling 13-week forecasts for maximum agility.

List all your revenue sources: Track all revenue sources, including sales revenue, royalties or licensing fees, grants, investment capital, and government incentives.

Enter the figures in the week/month when you expect the cash to be in hand—when you know your customer’s payment will be received, for example, not when you close the deal. Factor in extended payment terms, which are becoming more common.

List all your expenses: Track all expenses, including rent, salaries, supplies or raw materials (accounting for inflation), loan payments and fees, marketing and ad spending, and technology investments.

Do the math to see your running cash flow: For each week or month, subtract the outgoing amount from the income amount. Accounting advisors can help interpret these figures and provide strategic recommendations.

It’s Not Necessarily that Simple

The above cash flow forecasting method can be useful. However, it’s only as valuable as the information being entered. Accuracy requires a comprehensive analysis of all revenue streams and expenses, plus consideration of macroeconomic factors.

Many businesses have seasonal cycles that will impact cash flow forecasting. You’ll also need to factor in your methods of collecting accounts receivable and handling inventory management. Advisors can provide automation and analytics to optimize these processes while providing real-time cash visibility.

Outsourced accounting teams help you create cash flow forecasts that are more accurate and more valuable. They can ask questions and offer insight you may not have considered to ensure nothing is overlooked.

Cash flow forecasting does not have to be overwhelming. With the right guidance, your forecasts can become practical tools that help you make smarter decisions and plan for sustainable growth.