Financial Data
Updated 26 Feb 2020


Accurate cash flow forecasting

Because cash is the life-blood of any business, an effective cash flow forecast can mean the difference between success and failure.


23 July 2012  Share  0 comments  Print


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Without cash to keep things running you'll quickly go out of business. The cash flow forecast shows how cash is expected to flow in and out of your business. It’s the main financial forecast your small business will prepare to measure how much cash is needed to operate the business and when it is needed.

As part of your business plan, a cash flow forecast will give you a much better idea of how much capital investment your new business venture will need. For the bank, the cash flow forecast offers evidence that your business will generate enough cash in future to repay a business loan you may apply for.

Cash flow forecasting incorporates the dimension of time into your annual sales and expenses forecasts, so that you can predict the future cash needs of your business on a monthly basis and check whether you will be able to pay your bills. A cash flow forecast measures liquidity and the ability of the business to meet its commitments as they fall due.

Whether your business is growing or struggling, if cash flow isn’t managed correctly, you’re just as likely to encounter cash flow problems either way. A surge in sales, for example, will usually require an increase in the money required for working capital such as materials, equipment and labour, and if customers take too long to pay, your business could get into serious trouble.

A cash flow forecast will show you if, and when, you will run out of cash essential to run your business. Being forewarned allows you to work out solutions to anticipated temporary cash shortfalls or to arrange short-term investments for temporary cash flow surpluses.

How to prepare a cash flow forecast

  1. On the spreadsheet, enter the amount of cash you've currently got at the start of the period for which you're preparing the forecast
  2. Add cash inflows you expect to collect during the period including customer payments, interest earnings, dividends, and so on
  3. Your cash inflows will rely on the method of payment your customers use – cash or credit. Enter the expected cash sales immediately and the credit sales when your customers are likely to pay you. Your credit sales income will depend on your credit management policy, and how efficiently you control and collect payments from your customers
  4. Be specific about when the money is due for collection and remember to take into account your customers' payment histories and the economic outlook
  5. Schedule the timing of payments for your business expenses. Again, it's vital that you're specific about the amount and the month each expense falls due
  6. Add cash outflows from the items listed in your expenses forecast including payments to suppliers, loan repayments, credit card payments and taxes
  7. Include regular, irregular, and seasonal payments such as rent, repairs and maintenance as required, and inventory purchases.

What to do with a cash flow surplus

A cash flow surplus happens when your income exceeds your expenditure. It’s important to anticipate and plan how you will manage your cash flow surplus. Here are some options:

  • Use the extra cash to pay off lines of credit or outstanding loans. Paying off debt reduces the amount of interest you pay
  • Make a short-term investment in a low-risk investment instrument that will add interest to your bottom line while still giving you access to your cash. Remember to check what the investment fees will be
  • If your business is carrying a cash balance from month to month, consider investing it in a liquid account such as a money market.
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