6 min read
A cash flow forecast is an important part of your business plan: it shows what money you have coming in and going out of your business. This article gives you some practical advice to help you forecast cash flows and options for improving your cash position – including a cash flow forecast example for you to download.
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Cash flow can be improved through planning and organisation. A business that has a clear understanding of when cash is due in and out of the door will be able to better maintain a positive cash flow.
Actions that can be taken to improve cash flow include forecasting and managing and monitoring of receipts and payments.
As detailed above, cash flow forecasts require a business to consider their monthly income and expenses and plan for these going forward.
Once income and expenses have been identified by a business and actual payment and receipts have been forecast this information can be used to highlight issues and target any areas for improvement. This may include chasing up any customers that consistently pay late or negotiating longer payment terms or discounts with suppliers.
A business should monitor its cash flow against the forecast and identify any causes for variances.
If cash inflows are a lot lower expected it may be that there is an error in the sales assumptions. Similarly, if outflows are higher than anticipated then one or more expenses may have been overlooked.
A thorough understanding of the costs, revenues and timescales associated with running your business will lead to improved cash flow and the ability to make decisions based on this.
To forecast cash payments a business must consider all costs that relate to its operations.
This includes direct costs of producing the goods or supplying the services, e.g the material used to build a product and indirect costs such as rent, utilities, travel, phone bills and incidental expenses.
After forecasting sales, a business needs to consider the cost of producing the goods or supplying the services to meet that level of sales.
Looking at historic data such as supplier invoices or reviewing contracts will help a business to identify what these costs are likely to amount to for the required quantity.
Similarly to forecasting cash receipts, a business needs to consider the amount of time from receiving an invoice to making a payment by taking into account the credit terms that are offered by suppliers. If purchases are made using a business credit card the payment date of statements should be used within the forecast.
If payment discounts are offered by suppliers for quick payment then a business can use this forecasting process to help identify whether their financial position is adequate to take advantage of these.
Some indirect costs may be paid on a monthly basis, such as rent and reviewing bank statements should help a business to identify and forecast these cash payments fairly easily.
Other expenses may be more ad hoc and can be harder for a business to forecast.
Reviewing previous months’ expenditure will assist with identifying payments, and analysing upcoming business activity can highlight any exceptional costs that may be incurred.
It is important to be realistic when forecasting for future cash payments as understating these may only lead to cash pressures on the business.
Learn more about managing the cash flow of your business. Click on the Start button below to begin.