What is a Cash Flow Forecast?
A Comprehensive Guide for a Cash Flow Forecast
A cash flow forecast is a financial document that projects the future cash position of a company. It estimates the amount of money that will flow in and out of a business during a specified time frame. A cash flow forecast is a key component in designing financial strategies as it provides an estimate of a company’s financial standing in the future.
A cash flow forecast is typically used to project an organization’s cash position for the next 12 months. However, in some instances, it can be used for a shorter time period such as weekly, monthly, or quarterly. Cash flow forecasts can help you prepare for the future, so speak to your accountant, or get in touch with an accounting firm that can help you design an effective cash flow forecast.
Related: Learn how an accountant can help cure cash flow problems in your organization by reading our guide.
Why use a Cash Flow Forecast?
A cash flow forecast is an accurate and reliable determinant of the projected cash that you will generate and expend, from your future business revenues and expenses. Business owners add value to their companies by using these reliable forecasts to determine future finances and investments to make key decisions.
How to Create a Cash Flow Forecast?
An effective way to manage your business’s cash flow forecast is by using an intelligent cash management tool. At Clear House Accountants, we provide all our clients with a free intelligent cash management solution, helping them predict, manage and plan for cash inflows and outflows.
We have also created a video, as a helpful guide, for business owners who are trying to create a cash flow forecast.
Video: How to Create a Cash Flow Forecast?
We understand that managing a company’s Cash Flow can be tricky, so we have highlighted the key steps to create a cash flow forecast.
How can Cash Flow Forecasts Add Value for Business Owners?
- Help Businesses Meet Financial Goals
Cash flow forecasts can help businesses recognize their financial requirements to meet their goals and objectives. By designing a number of alternate scenarios, business owners can get a better understanding of how different scenarios impact the cash flow of their business. Identifying and eliminating weak strategies early on helps business owners gain confidence to pursue their business interests.
- Project Future Cash Income and Expenses
Cash flow forecasts are able to provide projected cash income and expenses for businesses. When it’s compared to actual sales and expenses, it will tell you how the business is performing on paper and in terms of real cash.
- Identify Business Financial Needs
With the help of cash flow forecasts, businesses can identify their financial needs. For instance, they can determine if short or long term business loans are required or if the business expects to incur major capital expenditure in the near future.
- Prepare for the Future
Efficient financial management requires you to anticipate the outcomes of every change you introduce to the business and the impact it will have on your financials. Being prepared for unforeseen circumstances can make a big difference in the success of a business.
Having enough cash to clear tax and VAT liabilities can sometimes become difficult, you should make sure that the tax accountant you work within your existing accounting firm is not only helping you prepare and submit tax returns but is also working with a suitable business accountant within the firm to help you plan for the cash outflow the tax liability brings with it.
In essence, utilizing an accurate and detailed cash flow forecast will enable business owners to improve their decision making, enhance problem-solving capabilities and strengthen their financial management.
What are the Elements of a Cash Flow Statement?
Your cash flow statement should comprise of three key components:
- Probable Sales
If you are planning to launch a business, it’s essential that you extrapolate accurate projections of your future sales. You can collect the data from prospective customers, other businesses in the market and experts in the industry. An effective technique to do competitor analysis is through Benchmarking your Business.
If you are already in the market, you can estimate your probable sales for the incoming time period, by inspecting your sales records from previous years. You can also identify the impact of any discounts or promotions you offered on your past sales. This will help you identify and understand any seasonal patterns that will impact your business sales.
It’s also important to take into consideration the future of your business and the required targets in the equation, whilst estimating your likely sales. Other than your sales history, you should also be considering emerging market trends and changes in pricing policy, as they might have an impact on your business.
- Expected Time of Payments
After you have successfully estimated your likely sales, you need to factor in the time of receipt, of those sales, in the forecasts. You need to make sure that you adjust the expected time of payments in accordance with your payment terms.
Related: If you are a small business owner struggling with getting paid on time, read our guide to help you receive your payments punctually.
- Estimated costs
By working out your likely sales in your cash flow forecasts, you will be able to get a fair projection of the amount of cash that is going to be flowing into your business. You also need to gain an insight into the amount of cash that will be flowing out of your business.
Business expenses cause the outflow of cash in a business. These expenses fall into two categories: fixed costs and variable costs.
- Fixed costs
Fixed costs are consistent expenses that your business incurs on a regular basis. Typical fixed costs are, but not limited to, rent, salaries, insurance, telephones, and internet connection. Generally, these expenses remain the same, regardless of how much you earn.
- Variable costs
Variable costs are fluctuating expenses that are directly proportional to output. As businesses expand their production capability and services, they incur higher variable costs. Typical variable costs are, but not limited to, direct materials, commissions, credit card fees, and freight out. Variable costs grow with your business. After predicting your probable sales, you can anticipate the resulting expenses in the future.
When making a cash flow forecast, it’s important to list your fixed costs separately from your variable costs so you can better evaluate your cash outflows.
Below is a sample of a typical Cash Flow Statement.
Related: Qualified Bookkeepers will help you set up an effective foundation which will be a key to your cash flow forecasting process.
If you have an effective cash flow forecast, you should work with your business operations team and your accountant to work effectively on building a process to update it regularly.
Why is a Cash Flow Forecast Important?
Cash flow forecasts are essential to business growth. If used properly, they can help your business grow:
- Determine the possible cash shortages in the future, which businesses can utilise to prepare themselves to tackle financial uncertainty head-on.
- Make informed investment decisions, which will result in happy investors and satisfied creditors.
- Calculate the amount of cash inflow of your business in the future, that can help you ensure that you can pay your vendors and employees on time.
Related: Find out how cash flow forecasting can help your organization grow.
Clear House Accountants are specialist Accountants in London who have been working with a variety of businesses, big and small, helping them build their operational and financial processes to help grow and expand their business. Contact us to learn more.
Anam has a degree in accounting from the Prestigious St John’s University, and works as a senior director in Clear House.
Before working in Clear House, Anam worked in various commercial roles, the last one being the VP Operations for a prestigious business organisation,working on improving the organisation’s operational efficiency, growth and high level client management.
Anam manages clients ranging from software companies to large property developers and managers. Notably, she recently worked with a large property development company building large scale developments in London and the surrounding area.