To begin the process of making and updating your own cash forecasts there are certain things you must have available. There are also some analytical tasks that must be accomplished. Let's look at the list first, then discuss each one in turn.

Financial Statements
Sales (Income) Forecast
Accounts Receivable Collection Patterns
Disbursement Patterns for Inventories, Expenses, Payroll,
Debt, Etc.

Financial Statements

The first things that must be available to you are financial statements, including both an income statement and a balance sheet. It does not matter whether your statements are prepared "in-house" or by an outside source, such as a CPA or a bookkeeping service. The important thing is that your statements are accurate, regular (preferably monthly) and timely.

It is most important to be comfortable with your financial statements and able to read and understand them without undue difficulty. You must be able to understand the revenues, costs and expenses and to analyze the types of transactions that make up each specific line item or account on the income
statement. Likewise, with respect to the balance sheet, you must know how to verify each individual asset and liability to its "real world" supporting documents in your office. Only through such capabilities can you reach the level of understanding of your business and its finances necessary to do a meaningful cash forecast.

More specifically, the income statement provided to you should be a "percentage income statement," which means that it shows each line as a percentage of total revenue. A sample of such a statement is contained in Appendix A. It is important that you have these percentages, because in some instances they will become the basis of your projections.

Sales Forecast

The foundation upon which you will build your cash forecast is your sales forecast. To project sales with confidence, you must go through an organized process. The sales forecast process consists of the following steps:

1. Divide your sales or revenues into logical categories that have similar characteristics and respond to similar variables. Hopefully your financial statements or other management reports are grouping your revenues this way.

2. Analyze these categories over the last three years if possible.

3. Do some research in trade and economic publications about factors concerning your industry, your customers or client groups, your product, your geographical region, etc. This will serve to broaden your "horizons" and give
you a larger frame of reference within which to make decisions. You can go to your trade association, the research desk at a public library, the library at a local college or university or the Arkansas Small Business Development Center and talk to their information specialist to get leads.

4. List and analyze the specific variables that will affect each category of your sales or revenues for your forecast period. This will involve a very thorough process that will consider several variables. Some of them are:

Price
Customer Demographics
Product Availability or Production Capacity
Marketing Plans and Budgets
Geographical Market Changes

By working your way through these variables, you will address many of the most basic decisions that must be made to ensure a successful operation. This level of planning is foreign to many small-business entrepreneurs, but it is just as valid for you as it is for General Motors or Microsoft Corporation.

Accounts Receivable Collection Patterns

If your business sells a significant portion of its product or service on credit, you must do an analysis of your accounts receivable collections in order to produce an accurate cash forecast. You must know what the time delay is between the credit sale and the ultimate collection of the cash for the
transaction.

Set up a worksheet, either on paper or on your computer, and analyze several months of credit sales and collections. Set up column headings across the top for months and list transactions down the worksheet. Do a separate worksheet for each month's sales.

For example, if you were analyzing January's sales, make your monthly column headings begin with January, then February to the right, with March next, then April, then May, etc. List each sale on the left, and put its collection in the appropriate column on the right. When you are finished with January, add the columns.

Suppose you had $10,000 in sales, and the collections were $5,000 in February, $3,000 in March, and $2,000 in April. You would know that 50 percent of your collections of January sales came in the first month after your sale, 30 percent in the second month, and 20 percent in the third. If you apply this method over six to 12 months of sales activity, you will have the raw materials necessary to do a collection patterns forecast. If the results are consistent throughout the year you can use average numbers. However, if your collection patterns vary with the time of year, you may want to use monthly data rather than averages.

Now look at the sample Accounts Receivable Collection Patterns Analysis form in Appendix B-2. This is the form you will fill out with the results of your monthly analysis. It will be used later as we put your forecast together.

Disbursement Patterns

Conceptually, this is not a difficult step, but a fair amount of detail work is necessary to accomplish it. First consider the following categories of expenditures:

Inventories
General Operating Expense Accounts
Payroll (including payroll tax deposits)
Debt Payments
Income Taxes

Your goal here is to develop information that will tell you what your monthly cash payments are for each of these categories. Some will have a regular percentage relationship based upon monthly sales or revenues. Others will be fixed in amount, such as rent or note payments. It is your responsibility to become sufficiently familiar with each category to be able to project the future with confidence.

This is where your sales forecast comes into play. Using your monthly projection of sales, you will project a disbursement result that is related to the level of sales. If you have copies of monthly income statements with percentages (see Appendix A), these percentages will be helpful. If you do not have that information, but you do have an income statement, then you can calculate the percentages yourself by simply dividing each expense item by net sales.

That same income statement (and your general ledger) will give you the various expense headings necessary for your monthly expense projections.