A cash flow forecast is in essence a cashbook that projects your business’s income and outgoings for a week, month or financial year.
It needs to list all the payments and expenditure you expect for the given period, the cash surplus or deficit left over after income and outgoings are accounted for, plus your business’s account balance at the beginning and the end of the period.
Typically presented as a spreadsheet document, many business owners use small business accounting software – to further automate the calculations subtotalling all their categories of income and outgoings – and consult their accountants to ensure greater accuracy.
Why do cash flow forecasting?
The amount of cash you have in your bank account dictates what you can and cannot do. Say it’s the end of the month and you need to pay your employees. It doesn’t matter how much money you are owed; either you have the cash to pay your staff…or you don’t.
This is just one example of why it is incredibly important for business owners to know how much money will be available to them at any point in the future.
Predicting income is without doubt the most difficult part of cash flow forecasting. Assumptions are your enemy, but you’re still going to have to make some judgement calls on how much income you think you’ll generate.
Remember, income isn’t just cash from sales but other sources of money as well – including cash injections from bank loans, interest on savings and income from investments. You also shouldn’t confuse ‘income’ for ‘profit’, which is your income after variable costs and overheads.
If you’ll be using your forecasts as part of a business plan or information memorandum for seed investment, produce three forecasts showing:
- A pessimistic estimate of income
- A realistic, or most likely, estimate of income, and
- An optimistic estimate of income.
By producing these three variations, you’ll show others you’re aware of the possible variables and you’re not just planning for the best-case scenario.
When forecasting your future outgoings, you need to aim to be comprehensive. The more detail, the better – even if it means drilling down into the petty cash and the ‘Friday night social events budget’.
- Work out your average variable costs per unit (item manufactured or service delivered).
- Calculate your fixed overheads such as rent or loan repayments.
- Factor in the seasonal variations you can see from your historical figures plus those set by your tax, employer and legal obligations. Finding out your balance date and tax return filing and tax payment due dates from Inland Revenue is a good start.
Consult your accountant or book-keeper to make sure your list of outgoings is as definitive as possible.
Once you have all your outgoings in place, you can apply any addition or reduction of costs you expect through any future planned changes in your business, such as the end of loan repayments or the projected need to recruit more staff.
Beyond short-term cash management
But cash flow planning and forecasting goes far beyond the day-to-day management of money in and money out.
It touches on many other business areas such as: when to invoice, how to collect payments, credit terms, supplier relations, capital expenditure, hiring, firing, buying, selling, reporting and more…
Planning and managing your cash is the backbone of any successful business, regardless of what success means to you.
For high growth enterprises it means you can invest smarter in growth whilst avoiding bankruptcy.
If work/life balance is more important to you than maximising capital value then it means fewer surprises and less firefighting, freeing up your time to spend however you choose.
If you’re struggling to build an accurate cash flow forecast, feel free to contact us and we’ll be delighted to assist you.