Cash Flow Forecast

Cash Flow Actual Reports record what has happened while a Cash Flow Forecast predicts the future.

The Receipts & Payments format is a great way to control your cash.

If cash flow is tight, you can make your forecast and then track what is happening through the month, perhaps leaving enough in the bank to make sure you can pay the wages and salaries.

If cash is always a problem and you are always at your maximum bank overdraft with payments overdue to suppliers… it is a serious sign of problems…and you should talk to your accountant…because you may need specialist insolvency advice.

I don’t know about the rest of the world… but in the UK… directors can be held personally liable for money owed by the company… if it is bankrupt and… the business carries on trading when there is no realistic hope of improvement.

Sorry to be gloomy but I thought I should make that point. It’s one thing to juggle cash to cover a short term timing problem…another if it is long term.

The purpose of  the Cash Flow Forecast is to see potential cash shortages well ahead of time and take the actions necessary to solve them.

You may be able to bring receipts forward, delay payments or…if necessary…arrange extra banking facilities.

The worst thing you can do is go to your bank when you are at your limit and you have to admit you need more money for the next three to six months.

It sends a clear signal to your bank manager that you are not in control of your business finances…and guess what… banks don’t want to lend to businesses that aren’t in control.

Much better to go two or three months ahead of time and ask for the extra facilities when you don’t yet need it. You still need a good story but your behaviour is sending out a much better signal.

Estimating Your Cash Flow Forecast

Finally a few tips on estimating your cash flow forecast.

First…note the words…estimate and forecast

It’s an indication but it is unlikely to be right.

This can get quite complicated so it might be worth buying some special software or paying your accountant to write a simple spreadsheet model for you.

Your short term forecast will be based on unwinding the debtors/accounts receivable and creditors/accounts payable in your balance sheet at the last period end.

Plus the impact of current sales and purchase orders…these are commitments.

Longer term forecasts need to be based on a Profit & Loss account forecast.

Then you will have to make your cash flow assumptions.

Perhaps your business sells some things for cash and others on credit…look back at the proportions over the last six months and make a reasonable estimate of what it will be.

Then look at the Days Sales Outstanding for the last six months which are a much better guide than your official terms. Again work with a reasonable average…and if you need to make improvements…and collect cash faster…do it gradually…and decide how you will make it happen.

Payments to suppliers work the same way but strip out your periodic payments first – your quarterly payment, six monthly payments and annual payments.

For payroll, look back at the last few payrolls for the percentage you pay in the month and the percentage that’s deferred and paid to the government.

Predict the one off events you know about…or are thinking about.

For VAT /  sales tax, you’ll have to work it out in detail…but make sure you are consistent between what you include in receipts from customers and payments to suppliers.

If you have a very good bookkeeper …or you have asked your accountant for help…best practice says you should have a forecast balance sheet for each month of the forecast…or at least the last month.

That proves the assumptions have been correctly applied, that the bank balance in the cash flow makes the balance sheet balance …and checks for anything accumulating in the balance sheet when it should pass through the Profit & Loss account.

Cash flow forecasting can be tricky…the extent you need it depends on…

1)    whether you have plenty of money…if so, you can work with monitoring actual cash flows and look out for trends

2)    whether your business is going through a period of change…getter bigger or smaller…because either can mean your intuitive feel for your business could be wrong.

3)    Whether your business is seasonal…the more last month is different to this month and will be different to next month…the more you need control.

Twitter Digg Delicious Stumbleupon Technorati Facebook Email

No comments yet... Be the first to leave a reply!

Leave a Reply