A cash flow forecast is an estimate of the money flowing into and out of a business during a set period of time. It covers predicted income and expenses, and helps you to see where you will be financially at any given point in time.
Cash flow forecasting can be helpful when making significant business decisions. It helps you look ahead, which is essential to the health of your business, and makes it possible to put strategies in place.
The goal of a cash flow forecast is to enhance business strategy. Because cash flow is one of the most obvious indicators of business health, forecasting is very important.
What are the benefits of cash flow forecasting?
Clarity has to be the greatest advantage of a cash flow forecast. By looking to the future, you will have the knowledge you need to make strategic decisions now.
For example, if you can see that your business will have plenty of cash at hand, you could start to plan to recruit more staff, invest in plant, move to larger premises, or buy more stock. On the other hand, if you can see that cash flow will be tight, then you can take steps to reduce expenses, perhaps putting expansion plans or investment on hold, and focusing more on driving sales.
Cash flow forecasting allows you to apply for loans or other types of funding to aid business expansion. Providing a clear picture of the future health of your business, It is one of the key processes in business that lenders will look for before they make their decision as to whether to fund your endeavours.
You can also adjust the numbers for a picture of how your business might perform under different circumstances. This will help you see how well you are geared up to deal with various risks that may affect your income or production capability.
Are there any disadvantages to cash flow forecasting?
Cash flow forecasting carries very few disadvantages. Providing you bear in mind that it is only a projection, and that it is not a set in stone prediction of the future of your business then you should be fine.
It is important to consider that things can change over time so, even if your forecast is accurate, external factors that are beyond your control, such as pandemics, recessions and natural disasters, can affect actual cash flow. This is why disaster recovery planning is also vital.
How to do a cash flow forecast?
There are three key components to a cash flow forecast. All are needed to produce an accurate representation of your business now, and in the future.
It is vital to note that for some cash flow forecasts, the three components are split into subsections for enhanced detail and accuracy.
Here are the three main components of cash flow forecasting:
You will need an estimate of your sales for the cash flow forecast time period. You can obtain this by looking at historical sales figures over similar periods. Do account for seasonal variations, as well as the impact of the wider economy. Be realistic too; assuming that past trends will continue may not necessarily be correct.
Timing of payments
Noting down when payments are expected in from customers is the next step. Good cash flow is highly dependent on timely payment of invoices. Take into account typical length of time to pay across all customers and again, be realistic. Just because your terms stipulate 30 days, does not necessarily mean you will be paid within that timescale.
Costs and expenses
You will need to note both regular costs, as well as variable costs. Include the likes of salaries, rent, professional services, utilities, subscriptions and bank and credit card charges, as well as stock and raw materials. If you are planning a major outlay at any point during your cash flow forecasting period, such as an investment in a new IT system, be sure to include this too.
Help with cash flow forecasting and cash flow management, from Office Assistants
If you are embarking in cash flow forecasting for the first time, and could use some professional help, why not talk to Office Assistants?
We have in-depth experience of helping businesses not just with cash flow forecasts, but also cash flow management. We can provide in-depth, expert advice on how to optimise your cash flow, so that you can potentially invest in the future growth of your business.
To learn more about our cash flow services, you are welcome to get in touch.