A rolling cash flow forecast allows you to view the future of the business’ cash flow for a specific period of time. For example, let’s assume that you have a 12 month rolling cash flow forecast.
In this case, the forecast may:
- Begin on January 1st
- Last through December 31st
- Update on February 1st
- Last for an additional 12-month period
When the forecast is originally made, it lasts 12 months from the start date. However, when the calendar switches to February, the forecast will extend for 12 months into the future.
In this scenario, you’re always having a clear view of what the next year of operations will be.
However, it’s not uncommon to run multiple forecasts at once:
- Monthly
- Quarterly
- Bi-annually
- Annually
- Etc.
Using a rolling cash flow forecast template will make it easier to keep your forecasts rolling into the next projection period.
Why Is It Necessary to Make Forecasts?
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Creating a rolling cash flow forecast is a lot of work. You must continually monitor your:
- Inflows
- Outflows
However, you can alleviate these challenges with the help of software and automation. The tedious task of making forecasts is worthwhile. Forecasting is necessary because it allows you to do a few things:
- Monitor your day-to-day cash inflows and outflows
- Make better business decisions, based on data rather than “guesses”
- Forecast where your business will be in the short- and medium-term future
- Plan for the future, whether this means securing financing or taking advantage of growth opportunities
Capital can either be in excess or in a shortfall. When you have cash flow that is in or close to being negative, you can use your forecast to indicate when these issues are likely to happen.
If you have forecasts that show cash shortfalls, you then have the time to:
- Secure low interest financing
- Begin cutting back on expenses
- Securing the future of your business
However, if your rolling forecast does show that your business is flush with cash, you can use these insights to grow the business even more. For example, you can opt to open a new office, market your business to make more sales or hire more workers.
A rolling cash flow forecast can help shape the future of your business with the in-depth insights that they provide.
However, you first need to make a rolling forecast. The steps below will help you create a rolling forecast that you can then leverage to your advantage.
How To Make a Rolling Cash Flow Forecast: Steps
Creating a rolling cash flow forecast is a straightforward process. Here’s how it works:
1. Set a Target for Revenue
The first step is to set a target for your cash flow forecast. No one knows your business better than you, so you likely already have a revenue target.
If you don’t have a target, one simple way to calculate it is to multiply your target sales volume by the average price of your product or service. So, if your goal is to sell 100 units at $1,000 each, then your target for revenue would be $100,000.
If you’re looking to create a 13 week rolling cash flow forecast, you know what will be required for each week to reach your target.
Rolling forecasts are not time-based. Rather, they are event-based. They are updated continuously, so setting a target for revenue is more useful than setting a target for time.
2. Gather Your Data
Rolling forecasts are created using data from your business. The data you use will depend on your business, but will likely include information from your financial statements or client invoices.
If you are a new business, you may not have any historical data to go off of. In this case, you can use industry data instead.
3. Use Scenario Planning
Businesses typically create more than one rolling cash flow forecast. You could have up to three forecasts that look at different scenarios:
- Standard scenario (business as usual)
- Emergency scenario for a 50%+ dip in revenue
- A 15-20% dip in the revenue scenario
These three forecasts can help your business make smarter decisions in a variety of situations. Unfortunately, downturns will happen, so being prepared will help your business stay afloat.
4. Make Adjustments and Adapt
Rolling forecasts are updated regularly. For them to be effective, it’s important to keep an eye on them, make adjustments as needed and adapt.
If you see a difference between your rolling forecast and the actual numbers, then it’s essential to take a closer look to find the root cause of the problem.
If you want to save time and reduce the risk of error, you can use a cash flow forecasting tool like https://cashflowfrog.com/ to create your rolling forecast.
The Bottom Line
Creating a rolling forecast will help your business plan for the future and weather slow periods. But it’s important to keep an eye on your forecast and make adjustments as needed to stay on the right track.
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