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5 Simple Steps to Create Your Cash Flow Forecast

Cash flow management is one of the key ways by which a business can stay ahead of a cash crunch. A cash-poor company would end up being insolvent. Cash is indeed the lifeblood of any organization. Effective cash flow management is crucial for small businesses and startups to maintain financial stability. It is important to have an idea about what is happening alongside the income line and to take steps to ensure that your business is cash rich. A cash flow forecast is one such tool that helps you to keep track of your business's cash position.

The easiest way to prepare a cash flow forecast is to break the task into several steps, then bring all the information together at the end.

1. Prepare the income or sales for the business – a sales forecast

For existing businesses, look at last year’s sales figures, then decide what adjustments you will need to make based on past trends, i.e. sales increasing, decreasing, or staying the same. Then, review your sales pipeline, and order book, and arrive at projected cash flow from confirmed revenue. These can be estimated billing of future months or pending milestones of current projects etc. Lastly, review your accounts receivable and capture collection dates for all outstanding invoices.

If you’re a new business, when you prepare your cash flow forecasts, start by estimating all the cash outflows. By doing this, you will get an idea of how much cash needs to come in to cover the cash going out, and therefore what sales you will need to make to cover this. Note that sales figures always change because they depend on various factors, such as the types of customers you sell to, how quickly they have to pay you, what the economy is doing (e.g. interest rate increases or unemployment rates), and what your competitors are doing.

2. Prepare detail on any other estimated cash inflows

Sources of cash (‘cash inflows’) vary from business to business. Examples are:

  • Owners invest more money (add extra equity) in the business

  • Loans are paid back to you or you sell an asset

  • GST rebates and tax refunds

  • Government or other grants

  • Other sources such as royalties, franchise fees, or license fees.

3. Prepare detail on all estimated cash outflows and expenses

When you calculate your cash outflows, work out what it costs to make goods available. By doing this, if you do need to adjust your sales numbers later (e.g. you actually sold 10 units in March when you thought you would sell five), it will be easier to adjust the actual Cost of Goods Sold.

Expenses can be money spent on administration or operation. Again, expenses depend on the type of business you are starting or already running. You need to project your expenses at least for the next 6 months based on the current billing/expected revenue growth and incorporate these projected expenses in the cash flow forecast. You need to analyze your balance sheet and understand the complete list of outstanding liabilities which includes business creditors and statutory payable. Incorporate these in your cash flow statement.

Other cash outflows are those expenses that are beyond the normal running expenses. Cash leaves a business (‘cash outflows’) in other ways. Examples are:

  • buying new assets

  • ‘one off’ bank fees such as loan establishment fees

  • loan repayments

  • payments to the owner(s)

  • investing surplus funds.

4. Prepare your cash flow forecast by putting all the gathered detail together

In the beginning, you will have decided the period the forecast should cover. Since cash flows are all about timing and the flow of cash, you will need to have an opening bank balance (i.e. actual cash on hand), then add in all the cash inflows and deduct the cash outflows for each period, usually by month. The number at the end of each month is referred to as the closing cash balance and this number becomes the opening cash balance for the next month.

5. Review your estimated cash flows to actual

This is the most important step of all. Once you’ve done your cash flow forecast, make sure you go back and check what you estimated against the actual cash flows for the period. Do this to highlight any differences between estimated and actual, it will help you see why your cash flow didn’t meet your expectations.

Remember that cash flow is all about timing and the flow of cash, so when preparing your cash flow forecast, make sure you are as accurate as possible on the timing of the cash flows.

You could also take the help of a virtual CFO partner to help your business with efficient cash management. They can provide you with strategies specific to your business and economic conditions and help stay your business afloat.

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