Cash Flow Forecast Your Personal Finance GPS

When you begin to take hold of your finances the first place to start is looking at your cashflow.

You can use a spreadsheet but many have found like I have that putting it down with pencil and paper makes it more real. Let’s keep it simple… no computer needed. Take a sheet of paper, leave a wide three-inch margin on the left, then divide the rest of the sheet into twelve wide columns, and finally divide each wide column into three narrow columns. Or you can buy sheets with columns already marked. They are obtainable at a Office Depot or Staples and are known as accountants work sheets or ruled columnar sheets.

Here is a link to an online cashflow worksheet:

Label the columns as indicated in the sample, one wide column for each month, and the first narrow column for the same month a year earlier, the second for this year’s estimate, the third ( to be filled in later) for this year’s actual figures.

The cash forecast, in its simplest form, is going to allow you to look into the future at the upcoming months and make estimates about each one:

• How much cash you will have on hand at the beginning of the month
• How much money you will take in during the month
• How much you will spend
• How much you will have at the end of the month

How detailed you make those estimates is up to you. The number of categories used in the sample cash forecast has proved about right for many people. But yours can have either more or less, depending on your needs. Here is a warning, however. Get started… don’t try for too much detail in the beginning. A simple worksheet which is used and maintained is better than one full of details that is not used.

The next step is to label the horizontal spaces in the left-hand margin. The top line should be Cash on hand and in checking account, end of previous period. That shows what you start each month with. On the next lines list receipts during the month including all cash coming in, paycheck, money borrowed, gifts, and so on. The total of all the first few lines, then, will give you all the money available during that month.

The next section covers fixed payments, the ones you can positively expect to be a certain amount. They will include rent or payments on the mortgage, various insurance premiums, regular savings, and so on.

Then come variable payments, the ones you know are coming but can’t tell exactly in what amount. They will be bills for telephone, cable bill, cellphone, electric, gas, food, clothing, and so on. In this section, inevitably, there will be a large sum of money spent but not easily accounted for. It will include all kinds of payments and incidentals too numerous and bothersome to record. This item is probably going to look pretty big but don’t worry about it and don’t try to break it down at least not at first. You will only involve yourself in needless paper work. Label it Other.

Here also leave a few lines for large nonrecurring payments such as Christmas bills, vacations, out-of-town trips, and so on. If you threw these into the Other category, it would distort it and make it jump around from month to month. You want it to be stable so you can estimate it accurately.

Now come the critical spaces. Devote the bottom of the sheet to a recapitulation. Label one line Total cash available, the next, Total payments, the last Cash balance, end of period. That, of course, will be the amount with which you will head the column for the next month.

Your blank cash forecast is now ready and you can start entering figures. If you have never done it before this is going to be very revealing. Before you start, here is a trick that is strongly recommended. Use three differently colored pencils: red, green and blue. Red will always be used for last year’s figures. Green will be used for future estimates. Then blue will be used later for actual results.

The way to start is to get out your checkbook stubs and receipted bills for the past twelve months and whatever other financial records you keep. Start with whatever month it happens to be when you read this. If it is June, all right, start with your records for last June and enter them in red. Probably you won’t have accurate figures for every category for last June but fill in every category anyway, guessing where you have to. Your check stubs should give you most of the data you need.

This is the time to take up your green pencil and begin making estimates for this month. You know how much you had at the beginning of the month, so enter that. You also know what the monthly paycheck is and you can figure the fixed expenses. The variable expenses you can’t know but here is where last year’s figures come in handy. If you don’t know the size of the electric bill you’ll get this month, just assume it’s going to be the same as the one you got a year ago. When it comes in you can pay it and then enter the correct amount in blue under Actual. And that will give you help in making the estimate for next month.

Don’t stop now, however. Still going through your old check stubs, fill in the red figures for the other eleven months. All twelve months will then have a column of red figures filled in. Next, begin filling in the rest of the green estimates. Keep in mind that they are only estimates so don’t rack your brains too fiercely. And by all means resist the temptation to decide right now that you are going to change your normal pattern of spending. This is a forecast, not a New Year’s resolution. You are trying to make a hardheaded judgment on what lies ahead.

As you go forward in your estimate, you will spot in such upcoming items as mortgage payments, insurance premiums, tax bills, Christmas spending. Each month you should have about the same big Other item. And you will be able to see pretty clearly how much cash you will have on hand at the beginning and end of each period. The average of these two figures for any month is your average working capital. If it is under $100, it is probably too low.

Here are a few tips that will make record keeping easy in the future. When you come home from a shopping, throw store receipts for cash payments into a box. Collect them and total them up at the end of the month… doing this daily is even better. Pay by check whenever you can. Make sure all family income goes first into the checking account, then out into other channels by check. Eliminate the use of credit cards.

This link to an online cashflow worksheet which is slightly different that what has been described above. It is based on a Zero-Based system Dave Ramsey teaches where you spend where every dollar every month and it fits in a category… the balance is zero at the end of the month. This is the method we use in our household and it works great.