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Cash flow forecast

Revision as of 17:26, 22 April 2019

A cash flow forecast is an important business tool for every business. The forecast establishes whether there is enough cash to run the business or to expand it. It will also reveal when more cash is going out of the business, than in.

A cash flow forecast (also called a 'cash flow budget' or 'cash flow projection') helps identify whether a firm needs to borrow, how much, when, and how it will repay the loan.

Building a cash flow forecast allows an evaluation of cash resources that are required and when they are required by. Business owners can identify likely future gaps in funding and plan for those gaps accordingly. It is a vitally important tool for predicting the continuing financial health of the business.

Additionally, cash flow models enable business owners to assess 'what if' scenarios by changing key variables to see how vulnerable the business is to price changes, staffing levels, exchange or interest rate movements, and other key drivers.

In larger organisations the cash flow projection can be integrated with day to day operations. This can help identify what production is necessary, what resourcing is required and can provide an assessment of the capacity within a business.

1 What should be included in a cash flow forecast?
2 Likely sales
3 Projected payment timings
4 Projected costs
5 Find out more
- 5.1 Related articles on Designing Buildings Wiki

What should be included in a cash flow forecast?

There are three key elements to include in a cash flow forecast: your estimated likely sales, projected payment timings, and your projected costs.

Likely sales

To start, you need to estimate your likely sales for the weeks or months covered by your cash flow forecast. The easiest way to do this is to look at your sales history from the last few years. Take note of any seasonal patterns, or the impact of promotions you have run in those months.

If you’re just starting your business, then you can use data from suppliers, industry experts and even competitors to make predictions.

When estimating these sales, it’s important to take any future plans into consideration too. Take a look at the current state of the market and any emerging trends, as these may have an impact on your business. Things to consider include any promotional activity or product launches, and the activity of competitors too.

Projected payment timings

Once your estimated sales are in place, you need to add in when you expect payments to be received.

As you probably know, you’ll need to factor a delay for most payments (most payments are usually 2 weeks late).

Projected costs

So now your cash flow forecast shows you how much income you expect, and when you expect to receive that income you need to estimate your outgoings.

Your business will likely have fixed and variable costs, and both will need including.

Fixed costs include rent and salaries, and will stay the same regardless of how much you earn. Add these dates and projected amounts, including bills, fees, memberships and tax payments.
Variable costs are the opposite – they’re usually dependent on the sales you make. For example, stock or raw materials. In this instance, you can use your likely sales to predict how much these costs will be.