Cashflow is the life-blood of all businesses, especially so with start-ups and small enterprises. As a result, it is important that management understands what will be happening with a business’ cash flow to make sure the business has enough access to fund to allow it to survive.
Many businesses are increasingly recognizing the importance of cash flow forecasting and cash flow management, especially in response to market disruptions and rising financing costs.
How To Forecast Cashflow
Cashflow forecasting is not as difficult as you may think, here are several tips to keep in mind:
- Forecasting is an approximation; so expecting perfection is a “no-no”. You should expect to have an error tolerance of 5 to 10 percent.
- Common forecasting challenges include data integrity issues, poor communication between departments, and the complexity of predicting future cash flows accurately.
- You need to commitment to updating your forecast regularly. This ensures that you don’t get to wander too far from your business’ actual cash position. Integrating multiple data sources can help improve the accuracy of your forecasts.
- Be conservative and don’t overestimate. Rather than overestimate your cash position, it’s best you underestimate so that you can be able to plan accordingly.
- Cashflow is all about the real cash at hand, money that is in your bank account). Any accruals and depreciation should be excluded.
- Don’t forget to regularly test your cashflow assumptions against the actual cashflows.
- Identify your estimated cash position for each period and compare it to actuals to spot discrepancies and improve forecasting.
How To Construct Your Cashflow Forecast There are two basic components to a cashflow forecast – inflows and outflows (more on this below).
The division of cashflow itself should be into weekly intervals and extended for 6 to 12 months. The forecast will probably become unreliable if it extends beyond this period. Cash flow forecasting supports long term planning and financial stability.
Here is the general structure for each period in your cash forecast:
- Opening cash balance
- Add sales/other revenue
- Subtract expenses (including cost of goods sold)
- Closing cash balance
Automating the cash forecast process can improve efficiency and reduce errors.
Cash Inflows Trade sales are primarily what make up the inflows and they are supposed to be included when the cash is received and not the sales date. Remember to take into account all rebates or trade discounts offered to your customers.
Generally what you use in estimating future sales are plan, averages or budget, but remember it’s better to underestimate. Include such investment income as dividends or interest whenever you receive them.
“One off” items such as equity injections or loan drawdowns should be included.
Cash Outflows
- Begin with general cash expenses such as wages and salaries, insurance, rent, lease and any contracted obligations.
- Taxation related costs should be included. This would include all GST payments, superannuation contributions, and PAYG.
- Costs related to sale items such as freight, costs of manufacture and logistics should be included to forecast sales – oftentimes at a certain percentage. For instance, costs of manufacture at 10 percent of sales. It is important to forecast goods sold and related costs accurately.
- Make use of the current spot exchange rate to change to local currency if you purchase your items in foreign currency.
- When you pay trade payables, include them – most times, trade payables are usually paid on a weekly, fortnightly or monthly basis.
- Make allowances for unforeseen expenses.
- Interest charges and fees from your business line of credit. Changing interest rates can affect your cash flow forecasts and liquidity management, so monitor them closely.
In summary, as soon as you have an accurate and reliable cashflow model, ensure you identify any possible cash deficits and plan accordingly. Good cash flow management and accurate forecasting can help businesses achieve greater accuracy and financial resilience.
Your cash sources can include all or any bank overdrafts, invoice discounting facilities, or business loans. It is important to note that you’ll have to plan for a lead time, if you don’t already have established cash sources to insure against any possible shortfalls as setting up new lines of credit can be time consuming. Producing liquidity at short notice can be costly and challenging, so advance planning is essential. Managing liquidity risk and incorporating risk management practices into your cash flow forecasting is also important to safeguard your company’s cash flow.
If you’re looking to get some extra help to better understand cashflow and its impact on your business, chat to the team today. We can also help with a number of unsecured business loan products which are a great way to get cash flow fast when you need it.
There are many benefits to using spreadsheets for cash flow forecasting, such as their simplicity and accessibility, but be aware of the risks of human error and manual data entry, which can impact the accuracy of your forecasts.
When planning for future periods, consider using rolling forecasts to help your business plan for the near future and adapt to changing conditions. Forecasting for the first quarter is especially important, as it sets the tone for the rest of the year.
Collaboration between the finance department, finance team, and other departments is key to ensuring well-defined processes and greater accuracy in your cash flow forecasting. Accurate forecasts and accurate forecasting are essential for effective financial planning and decision-making.
Market changes can affect your cash flow forecasts and planning, so scenario analysis and preparing for worst case scenarios is recommended. Use practical examples, such as forecasting for seasonal sales spikes or unexpected expenses, to illustrate how cash flow forecasting can be applied in real-world situations.
Ultimately, the critical importance of cash flow management cannot be overstated—it is vital for business survival and operational stability. Ensuring more money is coming in than going out is crucial for growth and maintaining a healthy company’s cash flow.
Introduction: Why Cashflow Forecasting Isn’t Scary
Cash flow forecasting is often seen as a complex task, but it’s actually a straightforward and essential part of running a successful business. By taking the time to understand and implement a simple cash flow forecasting process, businesses can unlock several benefits that directly impact their financial health. Accurate cash flow forecasts provide businesses with a clear picture of their cash position, helping them ensure they have sufficient cash to cover expenses, invest in growth, and weather unexpected challenges.
Prioritizing cash flow forecasting allows companies to make informed financial decisions, optimize working capital, and manage liquidity risks more effectively. With efficient liquidity management, businesses can avoid the stress of last-minute cash shortages and instead focus on strategic initiatives that drive long-term success. Ultimately, cash flow forecasting empowers businesses to take control of their finances, providing the confidence needed to navigate changing market conditions and achieve their goals.
Understanding Cash Flows
At its core, cash flow refers to the movement of money into and out of a business. Understanding these cash flows is crucial for effective cash flow forecasting and overall cash management. Cash inflows typically include money coming in from sales, investment income, or other sources, while cash outflows cover expenses such as accounts payable, debt repayments, payroll, and operating costs.
By analyzing both cash inflows and outflows, businesses can identify patterns and potential issues before they become problems. For example, reviewing historical data on sales and expenses can help a company forecast future cash flows and spot periods where cash might be tight. This proactive approach enables businesses to maintain positive cash flow, meet their financial obligations, and make smart decisions about investments, financing, and day-to-day business operations. Understanding your company’s cash flows is the first step toward building a strong foundation for financial performance and long-term success.
The Cash Flow Forecasting Process Made Simple
The cash flow forecasting process doesn’t have to be complicated. Start by identifying all sources of cash inflows, such as sales revenue, and all expected cash outflows, including accounts payable and debt repayments. Once you have a clear list, forecast these cash flows over a set period—whether it’s the next month, quarter, or year—using historical data, industry trends, and any known upcoming changes.
To improve the accuracy of your cash flow forecast, regularly compare your forecasted figures with actual results through variance analysis. This helps you spot discrepancies, refine your forecasting process, and make adjustments as needed. By following these simple steps, businesses can create accurate cash flow forecasts that support better cash management and more informed financial decisions. The key is to keep the process consistent and update your forecasts regularly to reflect the latest data and business realities.
Creating an Accurate Cash Flow Forecast
Achieving an accurate cash flow forecast requires careful planning and ongoing attention. It’s important to consider multiple scenarios, including worst-case situations, to ensure your business is prepared for anything the future might bring. Regularly reviewing and updating your forecast to account for changes in market conditions, business operations, and other external factors is essential for maintaining accuracy.
Using historical data and industry trends, businesses can create rolling forecasts that adapt to new information and help anticipate shifts in cash flows. For example, if a company notices a seasonal dip in sales, it can adjust its forecast and plan accordingly to ensure it always has enough cash on hand. By planning for various outcomes and staying proactive, businesses can avoid cash flow problems, maintain financial stability, and confidently pursue growth opportunities—even when faced with unexpected challenges.
