This is a simple but important concept. As noted in the definition of cash forecasting, you must define the time period for your forecast. The options are:

• Long-Term - one year or longer

• Medium-Term - one month to one year

• Short-Term - one week to one month

Most of your forecasting efforts will be in the medium-term category so a three-month forecast will be the example. This is a good place for most of you to begin, because it is close enough to today to allow most of the variables to be predicted with reasonable accuracy.

Later, as your proficiency grows and as you begin to make longer range plans and objectives for your business, you will want to extend the range of your forecast further into the future, projecting at least 12 months ahead.

There are typically two reasons for the very short-term forecast. The more desirable reason is to take advantage of excess cash balances by making very short-term, highly liquid investments. To do this you must know what your cash needs and excess balances will be for the short-term periods.

The more common reason for very short-term forecasts is to try to make an inadequate amount of cash stretch to cover required disbursements. It is always helpful, of course, to know what is expected to be received and what is expected to clear your bank on a daily basis, but too frequently short-term analyses are attempts to manage with inadequate cash, rather than an attempt to maximize investment return on cash. Ultimately the solution to most small business cash management problems is not to "micro-manage" cash on a daily basis, but to take a hard look at the plans and objectives of the business, and make a plan that will fit the business's ability to generate cash.

You must learn to look realistically at your business, its income and expenses, its growth potential and the cost of growth, and to make the decisions necessary to put it on a sound financial footing. Sometimes the proper decision is to stop operations if all reasonable projections show that there is no solution to the problems. The use of a forecast for this purpose, while not pleasant, is logical and often saves a considerable amount of money in the long run.