Small businesses often get themselves into trouble by running out of cash. This means they may not be able to fund expansion, grow their business through marketing or even just pay their bills.

The good news is you can avoid unpleasant financial surprises by using a cash flow forecast. A cash flow forecast enables you to track cash as it flows in and out of your business and reveals to you the causes of cash flow shortfalls and surpluses.

The bank balances at the end of each cashflow period are the key to determining your cashflow requirements. If these are positive, then it indicates to the owner that the business is self-sufficient in funding its daily operational cash flows internally. If they are negative, then they indicate outside funds are needed to sustain the operation of the business.

If you need to purchase some assets in the future, you can put the purchase cost into the cashflow to see if the business can afford it. The money for these purchases must come either from an internal operating cash flow surplus or from borrowings or from cash reserves built up in prior years. Your cashflow forecast will tell you whether the cashflow option is feasible.

Another way of using cashflow forecasts is identifying when you are going to have funds surplus to your operating requirements. The overflow often is used to reduce debt or fund expansions or to pay a dividend.

You will be able to use the cash flow statement not only to analyse your sources and uses of cash from year to year but also from month to month if you set up your accounting system to produce monthly statements. You will find the cash flow statement to be an invaluable tool in understanding the hows and whys of cash flowing into and out of your business.