Successful Cash Flow Forecasting
28th February 2015
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At some point in your business career you will almost certainly have to produce a Cash Flow Forecast, which shows (and/or predicts) the flow of cash in and out of the business.

The Cash Flow Forecast is probably the single most important document in your business plan - it is certainly the document that will receive the most scrutiny by any investor or lender. Many otherwise-successful businesses have been sunk by cash flow problems, often when trying to grow from the micro-business to the SME stage, but even large established businesses can fall prey to it. In fact poor cash flow - represented by more cash flowing out than in - is the single biggest reason why many businesses fail.

For this reason The Financial Management Centre always recommends every business produces a Cash Flow Forecast as part of their business planning, whether it’s during the startup phase, or when seeking to attract new investment or approach the bank for a business loan.

Cashflow forecasting sounds intimidating, but is can be a relatively simple process; essentially you need to use available information to predict how much money you will have coming in and out of your business at any given time. This last point is important because (for example) if you go insolvent in September the massive amount of sales you would have done that Christmas are suddenly irrelevant. As with comedy, with cash flow timing is everything.

A Cash Flow Forecast can help to:

  • Establish how much money is needed and when it will be needed
  • Help to ensure that capital expenditure is properly controlled
  • Encourage efficient use of resources through budgeting and the analysis of over and under-spending
  • Spot problems with customer payments
  • Make sure that the business can always afford to pay suppliers and employees
  • Provide credibility when approaching lenders or investors
  • Help with facing facts and decision making

An accurate Cash Flow Forecast will identify potential shortfalls in cash balances in advance, thus acting as a vital "early warning system" for problems arising up to 12 months ahead. This is, by far, the most important reason for a Cash Flow Forecast.

The most basic form of cashflow forecast is a spreadsheet, listing income and costs on a monthly basis, with yearly totals for each. To get credible data for income and costs you will probably have to break each down into categories, which in itself is a worthwhile and often eye-opening activity.

Seasonality is also important and must be factored in – not just those extra sales at Christmas but the extra heating costs at your premises during the winter period for example, and the temporary staff you’ll need to make and fulfil those extra sales.

When preparing a Cash Flow Forecast do always remember:

  • Be realistic – there’s no point in kidding yourself
  • Include every item – they all add up
  • Consider and model multiple scenarios – what if…
  • Factor in fixed and variable costs
  • Plan for seasonality

If you would like help preparing a Cash Flow Forecast, on its own or as part of a wider business plan or growth strategy, then locally-based accountants The Financial Management Centre can help. They will take the time to understand your business and take you through the planning exercise, and help resolve any potential problems which may be uncovered before they present themselves for real.

Give them a call on 01276 409036 to see how they can help.


About the Author

Carly B

Member since: 8th May 2013

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