So that you can prepare a cash forecast for your business and understand the concepts of forecasting, we must establish a good definition and consider several points that are included within the definition.

A cash forecast (budget) is a presentation of cash results based upon assumptions about conditions and actions expected to exist or occur during the forecast period.

Contained within the above definition there are four points to understand.

1. The time period (forecast period) for making your plan and cash forecast must be defined. Options will be discussed later.

2. Certain assumptions about what is going to happen must be made and documented to project the cash result. Making assumptions about what is going to happen in the future is a little scary for some small business people. Imagine taking the time to think about the future and making assumptions such as "sales will grow by 4 percent next year," or "I must add an employee next year, which will cost $XX in salaries, taxes and fringe benefits." This is where you begin to determine if you are serious about your business and forecasting. If you are willing and able to think ahead and make plans and assumptions, you are taking a giant step toward the goal of taking control of the cash flow of your business.

3. To be complete and understandable, a cash forecast must be prepared in written form, so you can review it, edit it and correct it. It may seem easier to "come up with a number" with your calculator, but by doing so, you will not have provided an organized way to evaluate what you did so you can improve.

4. Specific actions based upon your assumptions must be taken to cause your plans and goals to come to life. This is called "active management." If you want something to occur in your business and make your plans based upon that assumption, you should take definitive steps or actions to cause your plan to become reality.

To summarize this definition, first define your forecast period, and then make assumptions about what is going to happen; next make a written presentation of your forecast, and then take specific actions to cause the plan to happen.