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Preparing A Cash Flow Forecast

A cash flow forecast is a prediction of how much money is coming in and out of the business over a certain period of time. As well, forecasting cash flow is a beneficial tool that helps business planning- already off to a good start if it helps planning!

For businesses forecasting cash flow can be time-consuming but does introduce key accounting concepts such as fixed, variable and capital costs; all in which described below . A lot to think about but all very much important to your business.

What is cash flow forecasting?

Let’s start with that a cash flow forecast is a method that shows how and when a business expects to receive and make ‘cash’ payments over a certain period of time. Most time periods are 6-12 months.

This method is key to either a start-up or running a business as it works as a decision-making tool as well as helping to identify:

For a start-up: how much initial investment is needed to start? 

Whereas for a running business: what cash flow problems might occur along the way? Taking on new staff, if the business grows substantially.

Aspects to consider for a cash flow forecast

After discussing what cash flow forecasting is. The preparation for a cash flow forecast involves more than just itself. There are factors such as a sales forecast and key business concepts to consider.

Simply, a sales forecast is estimating future sales and the revenue it will generate over a certain period of time. As you can see it closely relates to a cash flow forecast. The difference is that a sales forecast focuses on the sales of products and services instead of just the whole businesses cash sales.

To learn more about sales forecasting take a look at Sales Forecasting: Making It Make Sense.

Next is the different types of business costs that a business should understand when preparing, these are;

  • Variable costs are things such as packaging costs and raw material costs that create the product. This amount increases and decreases depending on the businesses production or sales volume.
  • Fixed costs are the wages, business rates and other payments paid in advance like quarterly rent. These don’t link to sales or production volumes.
  • Capital costs. These are physical business buys like chairs, desks or even a car. Usually, a business wouldn’t be purchasing these as frequent as variable and fixed costs.

Another useful term to be aware of is working capital. This is the money that’s required to fund short term activities alongside long-term activities. Businesses might require loans to sub stand these expenditures.

What is described as ‘cash’?

Cash is simply direct debit and electronic transfers to and from the business’s bank account and within all of this comes a layout split into three sections. Referred to as; receipts- money flowing into the business, payments- money going out of the business and finally net cash flow/closing balance is just the amount of cash in the bank account at a certain time.

This example gives an idea of how a business doesn’t always make loads of cash at first. Over time a business will find peaks and troughs with these things, it’s how the business plans and manages them to make sure the business will survive. 

An example of the three sections used within a cash flow forecast. Just an example not factual. () equal negative balance.

Let’s look at each element more closely;

Receipts

Receipts are the part that shows sales income that’s received by the business which has been paid into the bank account. These should always be recorded in the month the business expects to receive money.

Some businesses might offer credit so this then means there will be a delay between giving the invoice to receiving the payment. In this case, some invoices allow a 30 day period to pay, so if the invoice is issued in March the cash flow should state that the money from this would be received in April.

VAT (Value Added Tax) is also under the area of the receipt. VAT is money collected on behalf of the HMRC. Don’t forget, VAT is used to pay back the HMRC.

Additionally, any cash that is received from non-trading businesses/sources can be sectioned under ‘other income’, these can be bank loans and grants.

Payments

Moving forward, there’s the payment section of the cash flow forecast. In this section is the costs that the business pays for such as wages etc.

Payments aren’t always the same each month so a business needs to be able to look at the sales forecast and the plan to see in which months prices might increase or decrease to make sure the cash flow forecast is in accordance with that.

Net cash flow/closing balance

The last and third section of the forecast is the net cash flow/closing cash balance. This shows the total of cash receipts minus the total of cash payments for each month. Finally, the net cash flow is then added to the opening balance to give the closing balance of each month.

Also, a closing cash balance should correspond with the bank statement.

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Beginning your cash flow forecast

There are several applications a business can use to set up its cash flow forecast. These are accounting software, forecasting tools and spreadsheets.

Spreadsheets are a quick and easy tool that allows you to amend and refine your forecast quickly.

To start with a business needs to make a decision on how long the forecast will be, 12 months is a great time period to focus on. This time allows a business to have a clear understanding of where they’ll be in the next year and how they can set goals and look to achieve growth!

The next step is all about identifying. Identity the estimates of the split between credit and cash sales so sales receipts are accurate for the correct month. Alongside identifying whether any other cash could be received, could be money invested into the business- loans etc.

A business needs a clear indication of what is coming in and out to make sure this will be accurate! If you are a start-up business market research is brilliant to help with this.

Following onwards, determining how much goods will need to be produced to keep up with sales will help to achieve a look at how much will be needed to be spent on suppliers etc. Suppliers might want cash payments upfront and after a while establish trust equalling in monthly payments. A sales forecast is ideal for this!

Other assets to watch out for is any regular monthly cash payments; could be salaries, wages and other expenses along those lines. Don’t forget to include possible one-off fixed payments that might occur over the 12 months.

Time to compile all that information across the months to ensure numbers will correspond to when cash is to go out.

It can be a bit tricky to make sure this is all accurate so make a list of any assumptions that might happen. This could just be an old machine go bust along the lines, as long as you’ve made yourself aware; you’re working towards preventing risk.

Lastly, don’t forget to review!

Along the 12 months, it’s important to review your cash flow forecast, if said assumptions did happen renew and fix any bumps that might occur from that. It as well allows you to see whether your estimates were correct or weren’t. Overall helping the next forecast to be more accurate and possibly easier to put together!


Our training courses including Going For Growth and Greater Growth provide expert intelligence on more business advice! 

Get in touch, there might be something here that benefits you!

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