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Cash Flow Forecasts

A Cash Flow Forecast is an important tool in the financial control of your business, especially if you are expanding rapidly or profit margins are tight. All businesses ultimately depend on cash and it is vital to ensure that you have adequate working capital and sufficient long-term funding to both service your existing customers and facilitate growth. However, cash flow can be one of the most difficult things for a business to control and one of the easiest ways for a business to fail. Many businesses go under not because they are inherently unprofitable but because they do not manage their cash flows properly.

What makes a good Cash Flow Forecast? The most important thing is to have a solid understanding of how your cash flows behave. For example, how long do customers take to pay your invoices on average? How much credit will your suppliers allow you? Will the bank extend your overdraft or will you soon have to find alternative financing? Will the rent be going up soon? How much money will you need to spend this year on new stock or equipment? These are all questions that are best considered before they become urgent, not afterwards.

With the best will in the world, nobody can forecast the future with absolute certainty. Inevitably you will have to make assumptions and estimates about your income and expenditure for the months ahead. For this reason, Cash Flow Forecasts are best suited to short term use and should focus on the next 3-6 months. They are excellent for checking whether you will have sufficient cash to meet regular bills such as VAT and PAYE, and for timing supplier payments. They can also be used over longer periods if you have known financial commitments such as loan repayments or lease instalments. However, their accuracy is bound to suffer if they stretch too far into the future, because then you are forecasting profits as well as cash flow.

Profit forecasts are also useful tools but for different reasons. A business owner may want to know how much profit he can reasonably expect to make over the next year or so before committing to long term plans such as an expansion of the workforce or larger premises. You may want to persuade a venture capitalist to invest in your business by showing them when they can expect a return on their capital. Or it may be necessary to convince your bank that it is safe for them to extend your loan facility. These are all strategic decisions that are not so contingent on the exact timing of your cash flows compared to the decisions you will make in the day-to-day management of your finances. In that sense, you can view profit forecasts almost as mid-term business plans.

At Acumen we can put together a Cash Flow Forecast for you and identify the key variables upon which its accuracy will depend. We can also help with your general cash flow management such as negotiating bank loans and overdrafts, credit control, invoice factoring, financial control and any other factors relevant to your business. Please give us a call if you would like our assistance with any of this.

The following information sheets and accounting tips will tell you more:

Information Sheets Accounting Tips
bulletpoint Preparing a Cash Flow
bulletpoint Formulating assumptions
Phasing
Monthly phasing may not be enough if cash flow is tight – you may need to forecast cash flow daily if you are to avoid unauthorised overdrafts.
Assumptions
Check and revise your assumptions on customer payments as you go along and follow up any debtors who do not pay on time.
Key variables
Highlight the main items that will affect your bank balance, in both size and timing, and focus on them.
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