You need a forecast to ensure that you do not spend more cash than you have or expect to have. But for planning purposes you need to consider a few more points:

1. To ensure that the cash balance always remains above zero (or a desired minimum level),

2. To predict when cash levels will rise sufficiently above minimums to facilitate investment of idle balances.

Establish what your minimum acceptable cash balance is, whether that number is zero or some minimum positive balance that is logical for your business. Then go through the forecasting process to see if your plans and expected actions will keep you above that minimum standard. This is the first step in cash forecasting.

After forecasting successfully for a period of time, many businesses are able to switch their frame of reference to the second point listed above. If you are able to manage successfully and keep sufficient positive balances in your accounts, then you can make plans to use idle cash balances as a short-term investment pool for additional profit.

To summarize, the purpose of the forecast is to try your plan out on paper to see what the cash effect will be before you actually commit yourself to a course of action. Wouldn't it be nice to realize you were going to need more cash before it was too late and you missed a payroll or a payroll tax deposit? And better yet, if you will have unused cash balances, you can use low-risk, short-term investments to increase profit margins.

There are many good results that can come from regular use of cash forecasting techniques. Some of the more common are listed below.

• Anticipating Short-Term Financing Needs

• Financing Seasonal Business Fluctuations

• Planning Debt Reductions

• Planning Capital Expenditures (Equipment purchases)

• Taking Advantage of Cash Discounts

• Planning Inventory Purchases

• Evaluating/Designing Credit Policies

• Planning Long-Term Financing

• Increasing Investment Income

Incorporating one or more of the above items into your forecast will also enable you to estimate the cash effect before you actually commit yourself. Frequently, however, your need for a cash forecast does not revolve around a major event but is to determine what will result from day-to-day operations. This process is called planning for short-term cash needs and will be considered more fully later.