How do I forecast cash flow? | Cash flow forecast example

In the main, cash flow forecasts are used internally by a business to:

• understand their financial position
• identify any potential cash shortfalls
• ensure they have enough cash to pay suppliers, employees, etc.

However, if a business finds itself needing a loan, then the bank will request a detailed forecast of future cash flows before considering lending the money.  If a business’ cash flow forecast shows negative cash flow for an extended period of time then it is unlikely that a lender will accept the business for a loan on the basis that they are unlikely to be able to satisfy loan repayments when they become due.

Other parties considering investing in a business may also request sight of the cash flow forecast as a way of checking the health of the business that they are planning to invest in.

A cash receipt is an amount of money received by a business from a source which could be a customer paying for goods or services, interest on investments, additional funding paid in by the owner etc.

In order to forecast these receipts a business needs to understand their sources of income. 

Sales Income

A sales forecast is prepared to identify the value of goods or services that a business expects in a given period.  This forecast shows when sales are a made and/or services are provided, whereas a cash receipts forecast involves considering when the money for those sales is paid by the customer. 

By using this sales forecast, along with details of the credit terms offered to customers, you can begin to forecast cash receipts.

If a business allows customers 30 days to pay for goods/services from the invoice date then the cash receipts forecast will show funds coming in to the business the month following the provision of services/sale of goods.  If a variety of credit terms are offered to different customers then this needs to be taken into account.

Also it is worth considering that although a business may offer certain credit terms, there may be specific customers who always pay early or late.  Looking at previous sales and payment records will help to identify any of these and help a business to build this into their cash receipts forecast.

Also note that if the business is VAT registered then the sales forecast will show income exclusive of VAT, whereas the cash receipts forecast should show income inclusive of VAT as this is the value that the customer will be paying.

Non-Sales Income

Income from sources other than sales may include bank loans, interest and rent received.  As a small business owner you should consider these additional funding sources and identify if any are relevant to you, using best known information to record when you expect to receive this cash.

Regular monthly receipts may be easier to forecast, but be sure to consider any one off receipts that may be expected.

There are many different online tools, apps and software packages designed and developed to help a business with tracking and forecasting cash flow. These will vary in price and complexity so they may not all be suitable for small businesses but can be easily searched for online. One of these is Futrli – which uses AI to run over your data and inform your decision making. 

Software will help you present and store your cash flow information, however, a business will still need to understand their cash inflows and outflows in order to make use of such software.

Spreadsheets may be useful tool to assist with cash flow forecasting as information can be entered, modified and presented clearly in a simple report format.  Various functions within a spreadsheet allow users to automate some of the forecasting process and create ‘rules’ around the treatment of various cash flows. If you use Excel, the ‘goal seek‘ tool is a useful function. 

• For example, if Customer A always pays for goods within seven days of being invoiced then that anticipated sales value can be taken from the sales forecast and recorded within the cash receipts expected 7 days from the sales date.  A formula could be used to find any future forecast sales to Customer A and automatically enter that value as cash inflow seven days later.

Many laptops and computers are purchased with spreadsheet software already installed and users can find a wide range of websites offering free information and tutorials on how to make use of the functions that exist within these. 

Click the link below to download a cash flow forecast example. This cash flow statement will help you plan how much you expect to spend in costs, plan out how much you expect to make in sales, and keep an close eye on your cash position each month.

Cash flow forecasting is so important because if a business runs out of cash and is not able to obtain new finance, it will become insolvent.

Insolvency is a term that refers to when a business, or individual, is unable to meet its financial obligations (ie pay its bills) when they become due.  This is more frequently referred to as bankruptcy for individuals.

Insolvency happens when:

• the total value of a business’ liabilities exceed that of its assets
• a business’ current and future debts are unable to be paid. if whether your business has run out of money.

Insolvency law details the steps that are taken when a business becomes insolvent.