Cash Flow Forecast

What is a cash flow forecast?

A cash flow forecast is a document that helps estimate the amount of money that’ll move in and out of your business. It also includes your projected income and expenses. Cash flow forecasts typically cover the next 12 months, but can also be used for shorter periods of time – like a week or a month.

Why use a cash flow forecast?

Cash flow forecasts are primarily used to help the business owners plan how much cash they’ll need in the future.

Cash flow forecasts can:

  • Show you whether your business is meeting expectations. By comparing your actual income and expenses with your forecast, you can see which areas of your business are over or under performing and act accordingly.
  • Help you budget for equipment purchases or identity the need for a small business loan, which is very useful for your tax preparation.
  • Be adapted to see the effects of planned business changes. If you’re planning on hiring, for example, you can add the salary and related costs to see how it’ll affect your business’s financial position.

Running hypothetical business changes through your cash flow forecast is a great way to predict their impact. If you can predict any cash surpluses or shortages on the horizon, you’ll be able to make more informed business decisions.

You can also run best and worst case scenarios to see how your business will cope in difficult times, or what you’d be able to afford to do if trading is better than projected.

If a business runs out of cash (and can’t get a loan or funding) it will become insolvent. This means that its liabilities exceed its assets, unless its ongoing revenue covers its debt obligations. With some effective cash flow forecasting, however, things shouldn’t get to that stage.

What should be included in a cash flow forecast?

There are three key elements to include in a cash flow forecast: your estimated likely sales, projected payment timings, and your projected costs.

Likely sales

To start, you need to estimate your likely sales for the weeks or months covered by your cash flow forecast. The easiest way to do this is to look at your sales history from the last few years. Take note of any seasonal patterns, or the impact of promotions you have run in those months.

If you’re just starting your business, then you can use data from suppliers, industry experts and even competitors to make predictions.

When estimating these sales, it’s important to take any future plans into consideration too. Take a look at the current state of the market and any emerging trends, as these may have an impact on your business. Things to consider include any promotional activity or product launches, and the activity of competitors too.

Projected payment timings

Once your estimated sales are in place, you need to add in when you expect payments to be received.

As you probably know, you’ll need to factor a delay for most payments (most payments are usually 2 weeks late).

Projected costs

So now your cash flow forecast shows you how much income you expect, and when you expect to receive that income you need to estimate your outgoings.

Your business will likely have fixed and variable costs, and both will need including.

  • Fixed costs include rent and salaries, and will stay the same regardless of how much you earn. Add these dates and projected amounts, including bills, fees, memberships and tax payments.
  • Variable costs are the opposite – they’re usually dependent on the sales you make. For example, stock or raw materials. In this instance, you can use your likely sales to predict how much these costs will be.

Cash flow forecasts are pretty easy to prepare. The key is to keep them up-to-date and relevant.

Why are cash flow forecasts important?

Accurate and timely cash flow forecasting is important for a number of reasons:

  • By forecasting your income and budgeting accordingly, you can ensure suppliers and employees are paid on time. This’ll help avoid nasty situations like losing a supplier, and having to work through an employee’s notice period.
  • By calculating how much cash the business will have at the start of the month, cash flow forecasts can act as an early warning for future issues. This can help identify the need for a loan or overdraft far in advance.
  • Banks, investors and so on will usually want to examine a business’s cash flow forecast (among other documents) before investing in them or providing a loan. A professional and thorough cash flow forecast is a great way to win over external stakeholders.

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