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cash flow

Do you have a pro forma cash flow helping you manage your cash?

What is a pro forma cash flow?

The word “pro forma” basically means a projected outcome of financial results. The perfect pro forma cash flow is a projection of inflows and outflows of cash that a business is anticipating. The goal is to make sure the incoming money from marketing and sales activities is enough to pay for expenses as they become due while leaving extra cash in the bank.

Seems simple right?

It’s not and can be very frustrating for the following reasons:

  • - The timing of accounts receivable or money expected from customers never lines up with the timing of accounts payable, or the money is due to vendors and suppliers.
  • - Payroll and taxes need to be paid regularly from excess cash flow, which rarely is available.
  • - There is always a list of outstanding checks or upcoming pre-authorized debits that don’t reflect in the bank account balance.
  • - Every business experiences “one-time” or unbudgeted expenses that are hard to plan.
  • - Running out of cash is always a last-minute and reactive exercise that takes time away from a business owner.
Once you begin to use a pro forma cash flow, you will wonder how you managed your business before having it. Having a clear understanding of your current week and future week cash position will improve how you work your business.
Pro Forma Cash Flow
Pro Forma Cash Flow

What are the benefits of a pro forma cash flow?

There are many different benefits of having a pro forma cash flow that can change how you manage your business forever.

  • - always knowing where your cash is and where it needs to go
  • - confidence that you can respond to unexpected expenses
  • - actionable insights so you can focus each week on the tasks that matter
  • - faster collection of cash
  • - easily track pre-authorized subscriptions and payments
  • - no more sleepless nights!

Knowing where your cash is and how it is moving through your business is the most important benefit of having a pro forma cash flow.

What information does a pro forma cash flow include?

The perfect pro forma cash flow will account for everything that impacts the inflow and outflow of money every week, including:

  • - Bank balances
  • - Listing of outstanding or uncashed checks
  • - Schedule of monthly pre-authorized payments and debits
  • - Schedule of tax payments
  • - A forecast of accounts receivable
  • - An accounts payable schedule
  • - A payroll schedule
  • - Loan payment schedules
  • - Weekly starting and ending cash balances
  • - Working capital balance

A perfect pro forma cash flow tailored to your business will change how you look at your business and manage it.

How do I create a pro forma cash flow?

Your bookkeeper, accountant, controller, or anyone else on your finance team can assemble the information needed to create a practical pro forma cash flow. Most of the information you will need is available through the reports found in your accounting system. Some of the information you will need to create will be based on bank and loan statements.

Microsoft Excel and Google Sheets are the two most popular applications for creating a perfect pro forma cash flow. Individual tabs or sheets get made for each segment of information you have which gets aggregated on a summary tab or sheet.

The best way to compile and present the information is to line up everything with a week number. For example, if you are in week 20 for the year, what financial transactions will occur on week 20? What are the cash inflows and outflows for week 20? Seeing your information every week with a projection for the following weeks is the simplest and easiest way to get a handle on the cash in your business.

How do I update a pro forma cash flow?

It is common practice to update your pro forma cash flow weekly. Many businesses will update a monthly or quarterly cash flow statement; however, this is mainly for reporting purposes, not operational purposes. A company should prepare a pro forma cash flow at the beginning of each working week to provide a projection that should guide the management activities of a business owner. A pro forma cash flow is an active and live resource for business owners to help them get ahead of any anticipated problems while planning for the future.

Having a template that you can update each week should take less than 15 minutes to complete. Make sure you create the template to include the correct calculations and functions. In that case, you should be able to export the information you need from your accounting system and then copy and paste it into your spreadsheet. All of the calculations and functions will automatically update, and you’ll be ready to start the week.

Doesn’t my accounting software do this?

Accounting software is designed to solve common problems and challenges faced by the majority of businesses. Accounting software is not capable and is not designed to be customized to the unique needs of your business. A proper and helpful pro forma cash flow should take into account many different pieces of information from many different sources. Accounting software is meant to record transactions and provide minimal reporting. This is by design because every business is unique. As an entrepreneur or business owner you will want to customize how you view the cash your business has and how it moves around. Accounting software is very limited but can be used to find the information you need to build a pro forma cash flow.