Financial management

Understanding cash flow forecasting

- October 29, 2014 2 MIN READ

Forecasting your cash flow helps you determine when you’re likely to be short of cash, giving you time to minimise the problem before it becomes a disaster.

What’s a cash flow forecast?

A cash flow forecast is simply an estimate of future movements of cash in and out of your business over a given period of time. Cash in will include receipts from customers, any tax or GST refunds you receive, and any money contributed to the business by the owner. Cash out will include any amounts paid out to suppliers, the ATO, wages and so on.

Preparing a cash flow forecast is not difficult, although if done manually it can be time consuming.

If your business is in a relatively healthy cash position you might forecast for 12 months looking at monthly balances. If cash is tight, you might prepare a forecast for just the next 30 days, with weekly or even daily balances.

Preparing a short-term cash flow forecast

For very short-term forecasts (up to 1 month), make a list of what you’re currently owed by your customers and estimate when these amounts will be paid. Add to this any new sales that you expect to be paid for within this period, plus any other receipts from other sources (refunds due, sale of assets and so on).

Next, prepare an estimate of what you’ll spend, including amounts you must pay to suppliers, loan repayments, taxes and net wages (i.e. excluding PAYG). Take care to include all irregular items, such as super BAS and annual insurances that are due.

Finally, bring all of this together: the balance of cash in your bank account now plus your anticipated receipts and minus your outgoings, gives you an estimate of your cash balance in 30 days.  If you really need to, you can do this on a daily basis – Excel is a great (though time consuming) tool for this.

If this figure is negative, you’re heading for a cash flow problem. Or if you’re doing this daily, any negative balance days will be a problem. Review the cash flow forecast and decide what you can do about it. Can you increase sales? Collect money from customers faster? Delay payments to suppliers? Though, try to avoid delaying superannuation and ATO payments, it may seem like the easy option, but often causes problems long term.

Want more articles like this? Check out the financial management section.

Preparing a long-term cash flow forecast

The same principles apply when forecasting cash flow over a longer period.

I recommend you start with a copy of your annual budget, and adjust that to take into account the expected timing of receipts and payments. You’ll go through exactly the same process that you would for a short-term forecast, only you’ll do it for each month throughout the year. In my experience, not having a budget is one of the reasons small business owners get themselves into cash flow problems, so if you don’t have one in place, now is a good time to start putting it together.

Excel is an excellent tool to use for long-term cash flow forecasting, but there are also some really good software tools that will extract data from your accounts and help you prepare both cash flow forecasts and budgets.

How accurate will my cash flow forecast be?

It’s unlikely you’ll ever get an absolutely accurate forecast of cash flow, but that shouldn’t stop you trying. A realistic forecast of cash position allows you to plan with confidence, and removes what for most business owners is their single biggest source of stress.

Do you forecast your business cash flow? If so, what types of issues has it helped you avoid?

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