Cash flow forecasts explained and how to design one for your business

A cash flow forecast can help a business maintain financial discipline and will identify problems with its cash balance at an early stage. The data you gather can also confirm whether customers are paying on time or need chasing. Each forecast is, in effect, an educated guess, as it suggests what a company’s bank balance will be when a designated amount of time has passed. This could be the coming quarter or year, but in most cases, it relates to a month.

How do cash flow forecasts work?

When you are about to experience a month of financial hardship, it’s always best to know in advance. An estimated negative balance allows you to plan for the coming weeks by negotiating an overdraft facility or cutting your spending – if possible. Furthermore, if you’ve been doing well and this is not reflected in the cash coming into your bank, you know there is an issue that needs investigating. Even if your cash flow forecasts are as expected, the figures they contain can help you stay on track in terms of your business objectives. When your revenue streams are underachieving or stagnating, it may be time for a change.

Ask for help when necessary

It may sound old fashioned, but to avoid the pitfalls of a temporary cash-flow crisis or insolvency, businesses still need to acknowledge that cash is king. You can seek help with organizing your finances from Perativ, their cash forecasting allows you to easily manage the cash held by tellers, in ATMs and in branch, so your distribution never falters. Understanding what is flowing in and out of your bank account and what the balance is likely to be, is essential if you want your business to have longevity.

Creating a cash flow forecast for your business

In the initial stages of designing a cash flow forecast, it’s important to divide your finances into two key areas:

Money that comes into your business

Your revenue, or the money which is paid into your bank account, will include funds raised through sales, investments and equities. Most companies will have quieter periods when sales are low and more profitable times. This can be triggered by a particularly successful marketing campaign or seasonal factors. Whatever your situation, be conscious of these changes when totting up the numbers. Usually, a company will have at least three revenue streams to consider, but not more than six. Add them together to reach your total income.

The money you pay out

Your expenses list is likely to be a lot longer than your revenues list. The items here could include rent, payments to suppliers, salaries, training for employees and marketing costs. Some bills, like tax, won’t be payable every month, but you should still put aside money regularly to make sure you don’t accumulate huge expenses by the end of the year. Once you’re finished, add these figures together and you have a total for your expenditure.

Calculate the difference between these amounts

Find out what your net cash flow is, minus your income from your expenses for the set period. This balance is what you will use to forecast your cash flow. If the final figure is positive, you can expect to make a profit. If the figure is negative, you will need to plan for losses.

Be realistic rather than optimistic

We all want our businesses to thrive and most people who choose to start their own company are incredibly ambitious. However, when you are working out your income versus your expenditure, it’s vital to be realistic about what you can achieve financially. Slightly more cautious estimates will mean you can outdo your monthly targets. This is preferable to finding the business in unexpected debt because your cash forecasting was over-optimistic.

Keep up the good work

Once you have a cash flow forecast in place, it makes sense to treat the document as a database that needs regular revisions. Review all the details you initially gathered each week or month and make the necessary updates. Look for emerging trends or patterns that show up, this allows you to increase the accuracy of your forecast as time goes by. In turn, your company will be better prepared for periods of financial flux and you will feel more confident in its future.

A professional cash forecast also serves as a recommendation to potential investors and lenders, as many will want to see proof of your solvency before agreeing to support the business.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes