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Cash Flow Forecasts

Posted on 20 October, 2014 at 3:00
One of the things that is even more important to a business than profit is cash. Even a business that is making a profit can potentially fail to survive if the cash position is not good.

Since nearly every small business will at some time find itself suffering from cash flow problems it is important to try and plan ahead and figure out when a cash flow problem could potentially arise.

This is done via a Cash Flow Forecast.

Most businesses will have a Cash Flow Forecast that looks ahead for a minimum of 3 months and often for a whole 12 months. These Forecasts are generally “rolling” forecasts which means that each month you drop your actual month and add the next month in sequence doing any adjustments to the months already forecast as appropriate.

The main difference between a Profit Forecast and a Cash Flow Forecast is that a Cash Flow Forecast specifically looks at the cash position of a business. In other words it doesn’t take into account those costs, such as depreciation, which have no direct impact on the cash position.

All businesses benefit from having a Cash Flow Forecast, and even more so if their sales are seasonal. Many businesses can be quiet just after Christmas or during a summer holiday period. By planning for these downtimes in cash flow, and adjusting purchasing as necessary it will be much easier to keep your business afloat.

How to create a Cash Flow Forecast

Cash Flow Forecasts can be created very easily using spreadsheet programs such as Excel. Decide whether you want it for three months or for a whole year, set up the monthly columns as appropriate and then look at your bank account to get your starting balance.

  1. The first thing that you will need to do is work out what you expect your sales income to be. The starting point is Sales Invoices that you have already raised and orders that you have already received. You then need to calculate your expected sales for the following months. If you have been in business for a while you can use previous year’s trends for your estimates otherwise look to any budget or Sales forecast that you have put together. You can also do some market research to come up with some reasonable estimates.
  2. If there is any other sort of income expected, bank interest, tax refunds etc. then these should be estimated next.
  3. The next thing to look at is “known” expenditure for the next year. These are those costs that are pretty much fixed and which you can be certain of, both re amounts and re timing. These costs would include salaries, tax payments, loan repayments, rent, mortgages, lease payments etc.
  4. Finally all other expenses need to be estimated. For the immediate month you will probably already have purchase invoices or will already have made orders of goods and/or services. For future months estimates will need to be made. As with the sales, budgets and/or previous trends can be used to try and determine these figures. Any planned items of expenditure such as fixed assets should also be included.  

Once all the incomes and expenditures have been estimated the figures should be entered into the forecast. The incomes for each month should be added to the cash position and the expenses deducted from it.

Once all the data has been entered you should be able to clearly see if there are any months when the cash position looks like it is likely to go into the negative. If so then you can determine what you need to do about it. You may need to delay a planned purchase or alternatively try and source some finance to get you through.

Cash Flow Forecast Template Available

Please email me with your email address if you would like me to forward you a template to use for your Cash Flow Forecasts.

Categories: budgeting

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1 Comment

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10:02 on 18 June, 2015 
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