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How a Monthly Plan Review Helps Avoid Cash Flow Problems

Sabrina Parsons

8 min. read

Updated November 23, 2024

As a small business owner, it’s critical to keep track of cash and understand how much cash is coming in and out of my business.

In fact, my cash balance is possibly the most important financial data point I track — it’s certainly one of the most important reasons to have a business plan and financial forecast. The fastest way to go out of business is to run out of cash.

Understanding my cash flow and how much actual cash I will have in the bank at the end of every month is one of the main reasons I plan and manage my business using a complete financial forecast. To make sure my business is on track I review my actual results against my forecasted cash balance and cash flow and can make better decisions to keep my business healthy. 

You should be doing it in your business, too.

Having a forecast and comparing it to your actuals is the best way to manage your business finances, and helps you make better, informed decisions about spending. Every month I compare where I am against my forecast, and my previous results. When you add the context of your previous performance, a monthly financial review provides a wealth of information to help you make better decisions for your business.

If you’re asking:

• •What’s the difference between a cash flow statement and cash flow forecast? 
• •What does a monthly review consist of?
• •How can it help me run my business better?

Then read on for the monthly review process I’ve used to manage my company’s cash flows for the past 20 years.

What is a cash flow statement?

Before jumping into my monthly review process, let’s cover a few key terms.

A cash flow statement tracks how cash comes in and goes out of a business. It’s one of the three main measurements of a company’s financial health (the other two are the profit and loss statement, and the balance sheet).

If you understand that profits equal revenue minus expenses, you basically understand a profit and loss statement. But consider that spending cash on inventory, new equipment, or paying back a loan means you have less cash immediately, but doesn’t always reduce your profits immediately. And if you make a sale and send out an invoice, but haven’t been paid yet, you have revenue on your profit and loss statement to increase your profits, but not the cash from that sale.

This is why the cash flow statement exists. It tells you how much cash you actually have in the bank at any given moment to cover your obligations and run your business.

What is a cash flow forecast?

While your cash flow statement looks back at what your business did, your cash flow forecast predicts what your cash needs will be in advance. Creating a forecast helps you predict how much cash you’ll have in the bank at the end of each month and will also help you understand whether you need any additional financing as you grow your business.

The last thing you want is to be on a good growth path but run out of cash. It’s pretty common for businesses to need additional cash to fund growth. A cash flow forecast will help you understand your future cash needs, recognize if you’re burning through too much cash, and be prepared to adjust well ahead of time.

So, how do you put together a cash flow forecast when things may be unknown?

By thinking through your future needs and forecasting your planned revenue and expenses. Here are some things you may consider when forecasting cash flow:

• •Need to buy new equipment?
• •Planning to hire for the busy season?
• •Need to buy more inventory for the future season?
• •Need to spend money on a conference or marketing activity that will yield more sales in the future (but will cost you up front)?
• •Paying back a loan?

These are all activities that impact your cash flows and future cash balance. A cash flow forecast will give you great insights about your business’s cash health and help you understand your cash runway at your current revenue and expenses.

To create a cash flow forecast, you just make educated guesses using a tool like LivePlan about your future revenue, direct costs, salaries and expenses, as well as asset purchases.  A complete forecast with the proper cash flow assumptions Do you invoice customers or collect cash immediately? Do you need to buy inventory months ahead a time before you actually sell the inventory?

I take time at the beginning of my fiscal year to create a full financial forecast using LivePlan that then gives me a complete cash flow forecast, alerting me to any possible future cash needs. I then manage my actual results to my forecast, resisting  the urge to make major changes more than once each quarter. The exception is if my forecast is off from my actuals by 20% or more. That tells me I was either too optimistic or pessimistic, and that I need to go back and make adjustments.

But if you’re constantly changing your forecast, your roadmap can become muddled and unclear. Give your business time to get through potential seasonality of timing issues on customers paying you and you paying bills, before you change the forecast. 

How do you do a monthly review to keep track of your cash?

An important part of the monthly review process is to start each month with a certain number of goals, or priorities, you want to accomplish. I like to select five.

• •What did I plan to do?
• •What did I actually do?

Let’s imagine a busy restaurant to illustrate what a monthly review looks like in practice.

Say you’re running that restaurant, and you have five goals for the month:

1. 1.Generate $10,000 in net income
2. 2.Hire an additional server
3. 3.Buy a replacement oven using a line of credit
4. 4.Swap out an under-selling item with a new offering
5. 5.Start experimenting with Facebook and Instagram ads

When you identify your goals for the month, you’re essentially making a prediction about how your financials will change and how your cash will be impacted as you work toward your goals.

So the month comes and goes, and it’s time for your monthly financial review.

Let’s say these were your results for the month:

1. 1.Generated $13,000 in net income
2. 2.Hired a new server halfway through the month 
3. 3.Ordered the oven with $20,000 on a line of credit
4. 4.Absorbed a 3% rise in ingredient costs for the new menu item
5. 5.Invested $1,000 in Facebook and Instagram ads

As you compare the actuals to the forecast, you can see the restaurant generated $3,000 more in net income than expected.

But there are also new cash obligations going forward: paying the new server, payments on the line of credit, higher food and marketing expenses.

By reviewing where you are, how you did against your goals, and comparing your actual results against your forecast, you can get a really good picture of what you cash balance will be next month and in future months. 

How does a monthly review help avoid cash flow problems?

It doesn’t take a monthly review for the owner of this restaurant to see that they brought in $3,000 more than expected in net income. But looking at the whole picture, the direct costs, expenses and the cash flows and comparing those actual results to what was planned helps paint a better picture of the health of the business.  But one month only provides a brief snapshot.

The real value of the monthly review comes from doing it repeatedly over time. 

Because this restaurant owner forecast their expenses, they can see how those added costs will affect their cash on hand over time:

• •Is the restaurant performing better than the owner expected? Maybe it’s time to adjust the forecast to reflect higher profits.
• •Can they afford the higher ingredient costs, personnel costs, and oven payments without facing a cash flow crunch down the road?
• •Can they afford to increase their social media marketing budget?

By comparing your actuals to forecasts over time, you’re answering:

• •Where are you overspending?
• •Where are you underspending?
• •Where might you need to make some pivots based on your spending?
• •How is your cash? Do you need to up your credit line? Or maybe you are in a position to finally buy that delivery truck because cash is better than expected.

If you don’t look at these numbers, you’re essentially going by gut instinct. And that makes everything feel bigger and harder when you make decisions. Imagine hiring that server, then hitting a cash flow crisis and needing to lay them off because you don’t have enough cash to make payroll. 

Business decisions are harder to make when you’re managing your business based on intuition. But the more you plan and then actually review things, the more comfortable you’ll get, and the better you’ll run your business. You’ll be able to make better decisions, like picking a time to invest in new equipment when you’re confident you’ll have enough cash to cover your obligations.

Your gut instinct is still crucial. But paired with data and information, the monthly cash flow review helps you cast fear away.

Get started forecasting your own cash flow projections

It’s okay if your forecasts aren’t perfect, especially at the beginning. Most of the time, when you start, you’re not going to do a great job. That’s because forecasting the future is essentially guessing.

The more you do it, the better you’ll get at managing your business finances and avoiding cash flow problems. Your guesses will improve, and your information will improve over time.

If tracking your cash flows still feels a bit complicated, try practicing with LivePlan’s downloadable cash flow template. Document your past month cash flow statements, or look ahead by forecasting your future cash flows — all within LivePlan’s easy to use, adjustable template. When you’re satisfied with your numbers, you can copy and paste them into your own business plan.

Sabrina Parsons

Sabrina has served as CEO of Palo Alto Software since 2007. She and her husband, Noah, founded a UK software distribution company in 2001 that was acquired by Palo Alto Software in 2002. Sabrina is a successful Internet expert, having served as Director of Online Marketing at Commtouch, Senior Producer at Epinions, and founder of her own Web consulting company, Lighting Out.