Cash Flow Forecasts
What Is A Cash Flow Forecast
The Cash Flow Forecast is the most important aspect of accounts preparation, be it 'Management Accounts'
- the accounts prepared by a company for internal management use, or accounts prepared for a lender, such as a bank to evaluate how you will be
able to repay the funding.
Where the Balance Sheet and the
Profit and Loss account are primarily prepared for your
'actual' year end figures for submission to government bodies, the Cash Flow Forecast needs to be, some say, pessimistic
as to your sales figure and expenses.
One problem we all face at some stage is preparation of a Cash Flow Forecast for the bank manager. It is
almost impossible to submit honest figures when you use pessimistic figures, if when you look at the finished result you say to yourself
'I would not give anyone a loan if I saw these figures'.
However, we suggest you do use pessimistic figures and inform the lender that the figures are pessimistic, and as such, are very
achievable. Returning to your lender 6 - 12 months after arranging a loan or overdraft facility, and asking for more funding
because your original figures were way out, will not impress the lender.
Why You Need A Cash Flow Forecast
One of the most useful bits of advice that established entrepreneurs give to people starting their own business is
this: 'cash is king'.
It doesn't matter what business you're in and how profitable it is, if you run out of cash, your business will struggle to
continue. If you can't pay suppliers you'll have nothing to sell, and it's a quick, vicious circle from there
to insolvency.
A good business needs a positive cash flow, where the amount of money coming in to the bank account each month at least matches
the amount of money going out.
Cash flow is something that needs to be monitored at every stage of business growth. Obviously if your business is
going through a rough patch, you need to monitor your finances carefully.
Overtrading - Cash Flow Problems
Bizarrely, if your business is doing very well, there is an even greater danger it could run out cash. It's a phenomenon
called overtrading.
Let's say you accept a new £10,000 order, which requires you to pay out £8,000 for materials and wages. The
chances are that you'll have to pay that £8,000 up to a month before your client pays the £10,000. If your
business doesn't have that cash spare, it will run out of money and throw a very large spanner in the works.
This is where a cash flow forecast is essential. It's a simple tool that will allow you to spot an obvious gap
in your finances before it happens, allowing you to take steps to minimise the effects, such as take out a short-term loan.
Cash Flow Forecast Example Templates (Financial Excel)
The cash flow forecast example templates below evenly spreads out all costs. In reality, utilities, lease, etc are
paid quarterly, some in advance, others in arrear. It is advisable to enter the proper amount in the month that the payment
is due to ensure you are aware of the highs and lows of your cash requirements. However, the example templates below are a good
tool for setting out your budget.
In most cases, a business should forecast for a 12-month period.
'Basic' and more detailed versions are available for your convenience. These cash flow forecast example templates may
also be downloaded from the Accounting Downloads section on the home page of this site.
Cash Analysis - Grouping Estimated Costs and Revenues To Keep Your Cash Flow Forecast Simple
Grouping these bills; for example landline phones, mobiles & broadband together as 'Telephones'. Then enter them into
the expenditure part of the cash flow forecast Excel spreadsheet. Copy these figures across for the other 11 months if
you think the estimated costs will remain at the same level. If you think any estimated costs will change, simply
enter what you estimate the costs will be.
Next you need to estimate sales revenue (income) for each month. Again, it may be beneficial to group types of
revenue together. This helps to keep your cash flow forecast simple. Remember this forecast looks at
money in and out of a bank account, so work you do today may not turn into cash for 30 to 60 days.
Finally, get the opening bank balance for this month. You'll be able to get this off your most recent statement or from
your online banking. Enter this figure in the white box at the bottom. Each month you should ensure your
bank statement and the cash flow forecast correspond (a forecast like this
is a great way to spot any mistakes made on your account).
And that's it. The cash flow forecast Excel spreadsheet will work out for you whether you have a negative or
positive cash flow each month, and how that will affect your bank account.
On a weekly or monthly basis, all you need to do is remember to enter every single expense and piece of income. Update your
cash flow forecast at the same time each week, and it will soon become a good habit. The information you will get from
your forecast will be invaluable as you run your business.
If your cash flow forecast shows that you may go overdrawn in 6 months time, then at least you have plenty of time to find ways
to overcome the looming cash flow problem.
If cash flow is a potential problem, the following topics will provide some possible solutions: -
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