How to Create a Cash Flow Forecast

For thousands of small to medium sized businesses, cash flow is probably the single most important aspect of financial management. And yet when it comes to planning and forecasting, it often receives scant attention. Indeed, many businesses unfortunately only realise how crucial cash flow is when problems occur.

Like any type of business planning, creating a cash flow forecast is about anticipating potential problems so they can be avoided. The annual cycle of reviewing accounts and setting budget forecasts for the next year is second nature to most people in business. But cash flow forecasting is in many ways about managing something more tangible, more intrinsically linked to the day to day running of a business.

Put simply, cash flow forecasting is about making sure money owed to the business comes in time to cover expenses owed out. If that balance is not maintained, companies can fail. Regular, accurate cash flow forecasts will:

  • Provide real-time insight into the health of the balance book
  • Give advance warning of potential cash shortages in time to avoid difficulties
  • Tell decision makers whether they have sufficient capital to fund their investment plans.
  • Act as a barometer of a business’s growth, indicating when new income streams need to be sought or expenses downsized.

Planning your Forecast

Cash flow forecasting is essentially an on-going calculation of cash inputs versus outputs. Unlike budgetary forecasting, which sets financial parameters based on business targets, cash flow forecasting should aim to reflect actual figures - you cannot create an accurate cash flow forecast six months in advance if you do not know precisely what income from clients is likely to total, for example. The calculation therefore needs to be run as regularly as possible.

Forecasting by its very nature requires you to make assumptions, but the closer these assumptions are to real data - for example, forecasting next month’s cash flow based on actual figures from this month - the more accurate it will be. To start off with, your initial estimates should include:

  • Anticipated sales growth
  • General cost increases, including wages
  • Potential price increases - external and internal.

Using this as a guiding framework, you can then begin to calculate incomes, based on ongoing contracts, sales data, deals being negotiated, and any other income streams you may have. Likewise, you offset these against all known and anticipated business expenses.

Choosing your Forecasting Tool

The accuracy, and therefore effectiveness, of your cash flow forecast depends on continuously updating and balancing a potentially large amount of financial data. The easiest way to manage this is to use a digital tool to assist you.

Spreadsheets like Excel can be set up to serve as both effective balance sheets and forecasting tools. For example, columns can be labelled with a series of dates for making forecast calculations, with all income streams and expenditures listed in the rows. Once figures are input for these under a date, formulae can be set to not only calculate actual total income, total expenditure and balance, but also to carry forward a forecast of the banking position to influence the next month. You can read more about setting up an Excel cash flow forecast here.

A second option is to purchase specialised cash flow accounting software such as Float or foreCASH. The benefit of these is that they can link in with existing accounting or ecommerce platforms you use, automating the creation of a balance book without the effort of inputting the data by hand. They will also automatically compare forecasts with actual cash flow, making and adjusting future predictions based on probability.

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