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Cash is the LIFE-BLOOD of any Business and making sure you know how it flows in and out of yours is vital to success. Plenty of profitable businesses have been upended by unexpected cash flow problems, but by forecasting and planning your expenditure you can give yourself the best chance of success.
Cash flow forecasting sounds daunting, but is actually a deceptively simple process that effectively amounts to using available information to predict how much money you will have coming in and out of your business at any given point.
At first glance it may seem like the financial equivalent of sticking your finger up in the air, but delve a little deeper into the figures and you can gain some valuable insight.
The most basic form of cash flow forecast is simply a spreadsheet listing income and costs on a monthly basis, with yearly totals for each. For added detail you can break costs out into categories – this can be handy for identifying seasonal variations in costs (for example, your heating bill will probably go up in the winter).
By keeping in view the following golden rules, one can make good forecasts of cash:
1. Be Realistic
The first rule of cash flow forecasting is to be realistic, sometimes even pessimistic. A cash flow forecast is not worth the paper is printed on if you are not sensible while predicting your income.
Planning to double your advertising spend because you think your annual sales will jump from £, to £m by next January will not only cause your bank manager to laugh you out of their office, it could also result in your business going belly-up as your costs skyrocket and your sales stay the same.
2. Remember the definition of Income and Cost
The second rule for effective forecasting is to remember that an invoice is not income, and an expense is not a cost.
That probably sounds rather counter-intuitive, but it’s all to do with when money enters and leaves your bank account. You may issue an invoice for £,, but if you’re not expecting it to be paid for days, you have three months to wait until you have that money to play with.
Similarly, you may buy a new laptop for £1,, but if you pay for it on a credit card or can delay payment, the financial impact on your bottom line may not be quite so severe or immediate.
3. Include Every Item
The third rule is to include absolutely everything in your forecast. A missed postage expense here or a forgotten utility bill there may not seem like the end of the world, but over months those incidental expenses can add up. If you’re sailing close to the wind financially, those unplanned expenses are what will tip you over the edge.
Get into the habit of including absolutely everything, and never compromise. If in doubt, throw it into the forecast. It’s better to have accounted for an expense and not have to pay it than vice versa.
4. Plan Multiple Scenarios
A good portion of cash flow forecasting is guesswork. You can never know exactly what your sales figures will be for a given period, especially one many months in the future. One way to combat this uncertainty is to forecast three scenarios. Take your best guess as a base, then create one scenario one with% higher sales and another with% lower.
For example, a business forecasting sales of £, and costs of £, would make a healthy £, profit for the year. With% higher sales their profits would increase to £,, which is great news. However, with% lower sales they would make an operating loss of £,.
5. Factor in Fixed and Variable Costs
When you separate your costs into different categories, take some time to think about which are fixed and which are variable.
Things like rent or certain utility bills (broadband, for example) will remain the same the whole year, which makes forecasting that little bit easier. Other costs, such as heating or electricity bills, may vary seasonally – so factor these changes into your cash flow forecast.
Some costs will be tied directly to your profits. Stock, for example, will only need to be purchased if sales are made. Business mileage may also be tied to how much business you’re doing. If you suddenly take on a slew of new customers you may need to hire more staff to meet demand.
It’s important to remember that if you are predicting an upswing in sales, these costs too will rise. Conversely, if you forecast a slowdown in your income, your cost base will decrease slightly.
6. Plan for Seasonality
The most important function of a completed cash flow forecast is to help you identify seasonality in your business and plan your finances accordingly.
If the majority of your sales happen at a particular time of year (for example if you sell Christmas Trees or swimsuits), a cash flow forecast will help you plan your expenditure for the portion of the year when your income is lowest, and allow you time to put contingency plans in place should your cash flow look unhealthy.
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Thanks for your invitation. I agree with Mr. Farhana's answer about the Cash Flow.
Agree with Mr. Farhana siddique. Thanks for your invitation.
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Excellent feedback from the experts. Good learning for me. Thank you
I agree with who have more knowledge on the topic of cash forecasts. However, what I want to say that to make good forecasts of cash, we have to check quartely of the followings:
- Cash Position, including point of sales , sudden withdrawal by on of the shareholder... etc (better quarterly).
-Expenses and expected Expenses.
-assets (current and non current).
after observing all these, and I might miss something, we can have good forecasts of cash.
Thanks for your kind invitation, I whish I made it right to answer this excellent quistion.
Does not matter cash flow is positive or negative based on actual need of business / calculations, if it is negative then again need brain storming to make it positive e,g can defer some liabilities payment , can plan to raise some short term money , important is business should not suffer at all for cash flow reasons , and this is the purpose of cash flow forecasting
