Cash Flow Forecast and why it’s important to your business
When you run a business, your cash flow forecast is a crucial part of financial planning. Having a healthy cash flow allows you to plan ahead effectively and have money available in case of an emergency.
Learn how to create a cash flow forecast with this guide.
Cash flow – what does it mean?
As the name implies, cash flow is a measurement of the amount of money that comes into and leaves your business over the course of a given period of time.
If you have money coming in from sales, then it is usually the money you get from the sale of your products. However, you might also get money from selling assets or getting a grant, for example. Amounts paid to suppliers, wages, and bills will be included in the outgoing cash.
Your business has a positive cash flow if you have more cash coming in than going out. Alternatively, a negative cash flow means you are spending more money than you are bringing in. When this occurs for an extended period of time, it is difficult to cover bills and other expenses.
The importance of measuring cash flow
In order to meet your existing financial obligations and plan for the future, it is important to measure your cash flow in order to keep on top of things. Businesses can succeed or fail based on cash flow measurement.
What cash flow forecasting can do for your business
Using a cash flow forecast, you can predict when you will run out of money so that you can plan accordingly. By doing so, you may be able to determine whether you need to reduce overheads or raise more investment capital.
A cash flow forecast can also help you determine if your business is doing well. You might be inspired to expand into new markets, hire new employees, or invest in new products as a result. If you know the performance of your business, you will be able to determine whether you can afford to make these changes.
Forecasting your cash flow
The following steps will help you get started and forecast your cash flow:
Choose the period for which you want to forecast
Choosing a forecasting period is the first step. Forecasting can be done a few weeks ahead or several months ahead, depending on your ability to accurately predict. Using sales data from previous years might be helpful if your business has been operating for several years. New businesses may have limited data available, so you may need to keep your forecasts short.
Don’t worry if you can’t forecast too far ahead as cash flow forecasts can change over time. Update them regularly to stay on top of things.
Make a list of all your income
Next, list all the cash you have coming in to the business for each week or month in your forecast. Each week or month should have its own column, and each type of income should have its own row.
You should start by adding your sales to the correct week or month. It can be helpful if you have previous years’ figures. Keep in mind that your forecast must show when the cash is actually in your bank account. The figures need to be added in for when the client has paid the invoice or the bank payment has cleared.
In addition to sales income, you’ll need to include tax refunds, grants, and investments from shareholders.
To calculate your net income, add up the totals in each column.
Your business’s outgoings should be listed
Besides knowing what is coming in, you should also know what is going out. List all the money you’ll be spending, such as:
- Rent
- Wages
- Assets
- Business loans, including fees
- Raw materials
- Tax
- Marketing and advertising
To calculate your net outgoings, add up each column’s total.
Calculate your running cash flow
You must now subtract your net outgoings from your net income every week or month. The result will be either a positive cash flow figure or a negative cash flow figure.
As a result, you’ll be able to keep track of your cash flow forecast, whether that’s week-to-week or month-to-month.
A long period of negative cash flow can pose problems, and you should consider what you can do to ensure you have enough money to pay your bills. On the other hand, if your cash flow has been positive for several months, you might want to expand or invest.
Comparison of estimated and actual cash flows
When you have done your cash flow forecast, you should go back and compare your estimated cash flows with actual cash flows. You can then see why your cash flow did not meet your expectations by comparing estimated and actual cash flow.
Forecasting cash flow: Top tips for accuracy
You should keep the following points in mind to ensure your cash flow forecast is accurate:
- Make sure that you take into account how seasonal changes might affect your cash flow and give yourself some wiggle room.
- If you have a positive cash flow, stash some of it away in your savings for tough times.
- Subscriptions, bills, and annual registrations should always be included.
- You should update your forecast regularly as new information becomes available.
Partnering with a cash flow loans specialist
Business finance specialists such as the team at First Oak Capital can help you find the right asset and cash flow finance products for your business’s needs. Get in touch with our team at 0800 066 3677 or get a quote to get started today!
