How to prepare and use cashflow forecasts
A good understanding of your cash flow cycle and business is necessary for you to draw up an accurate cash flow forecast. To help you get started we’ve described the six important steps in preparing a cash flow forecast which we’ve outlined below…
1. Decide the period for the forecast:
The nature of your business determines the time periods that you will select for sales forecast. A usual SME forecast may be over 3, 6 or 12 months. However, when cash flow becomes critical in a business, there may be need for more detailed forecasts for shorter periods such as weakly or even daily basis.
2. List all sources by which money enters into your business:
Income: Begin with all the income that is due to you, that is, what money the customer owes to you for the service that you have already rendered, and that you expect the customer to pay shortly. Sales forecast is quite tricky, but there are various methods to use such as use of a percentage of leads that will turn into sales.
You can also choose to base your cash flow forecast on the previous year’s sales multiplied by a factor, this principle works on an increase or fall in average year-year sales.
You must be able to review historical data, consider the impact of the economic climate on your sales, and use knowledge and experiences that are peculiar to your business sector.
Funding: This includes other sources such as investments, grants and loans
Asset sales: Another source of business income generation is the sales of assets such as equipment, property and vehicles.
Other income: These may include sources such as task rebates and bank interests.
3. Make a list of all your outgoings:
This reminds you about the money that you owe people and the set time for payment. You list everyone that you are indebted to including HMRC and suppliers of goods and services to your business.
Then outline all the expenditure that you anticipate within a particular time frame. This is necessary and serves to check what expenditures are essential and fixed for smooth running of your business, and what costs you can do without or cut (discretionary), and the costs that directly relate to sales. This helps you to draw up your variable costs with decrease or increase in sales.
4. Draw up your cash flow:
Various software tools and programs are readily available for use to integrate with your accountancy software. However, the easiest starting point for you might be to use a spread sheet to capture all outgoings and incomes over time.
Use our free cash flow forecast template from our Business Recovery Tool Kit to get started.
Download the Business Recovery Tool Kit now →
5. Make notes on your assumptions and review them over time:
It is necessary to keep reviewing the differences in the forecasted and actual values over time. This ensures that there is an improvement in the accuracy of your assumptions and forecasts.
6. Regularly update your cash flow:
The nature of your business and frequency of change of factors that affect the cash flow are major determinants of the frequency at which you update and review your cash flow forecast. Major variables include your business working capital, your investment plan and the rate at which your customers pay you. These factors and more will have an effect on your cash flow.
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