Why You Should Forecast Cash Flow, And How To Do It

Everyone in business knows that cash is king, so a cash flow forecast is an important tool. It is all about predicting the future. This cannot be done with complete accuracy of course, but that does not mean that you should ignore the need for a cash flow forecast. By taking a bit of care in its preparation you can use it to strengthen your business.

Cash Flow

What You Can Do With A Cash Flow Forecast


With a cash flow forecast you can do three main things:


  1. Plan for periods when cash will be low, and take steps to ensure you always have enough
  2. Identify when and how you can expand your business
  3. Identify areas of your business where you can become more efficient


The process of preparing a cash flow forecast involves looking at previous business results – your sales and your costs. When you enter them into your forecast you will look for trends, seasonal variations, and bottlenecks. For example, the process of preparing a cash flow will help you identify products that are performing well and products that are not. It can also help to identify areas of your business where you can reduce costs.


So cash flow forecasting is about business survival, business expansion, and business efficiency. It can also help you win orders, contracts, tenders, or new business funding.


How To Prepare A Cash Flow Forecast


How far your cash flow forecast looks will depend on your business – it could be one year, two years, three years or even longer. The crucial thing is to break it down into months, and to look at categories individually.


This applies to both cash coming into your business, and cash going out. For example, list product sales in their categories rather than simple overall sales totals, and break expenses down into categories as well. Finally make sure you include once-off expenses, such as buying new assets.

Cash Flow

Cash Flow Forecasting Tips


  1. It is about cash, not sales or invoices – with a cash flow forecast you are predicting how much cash is going to be in your business at a particular time, not the sales. If it takes a customer 60 days to pay their invoice, for example, this should be reflected on your forecast.


  1. Don’t overestimate – base your estimates on real figures where possible. This is difficult for new companies, but it is important to be realistic.


  1. Include everything – even small items add up over long cash flow forecasts. The more you include the more accurate it will be. Also, think about how sales and costs vary throughout the year. This won’t apply to everything – your lease payments, for example, should remain fixed. But things like heating costs will vary, depending on the time of the year. Sales may also vary – if you are a retailer, for example, Christmas might be your busiest time. Include all of this detail in your forecast.


  1. Model different scenarios – your completed cash flow forecast is a good guide, but what if your predictions are wrong? You can use the forecast to model different scenarios – what if sales are 20 percent lower than you expect, what would happen if you have to replace a piece of equipment unexpectedly, etc.


Finally, you cash flow forecast should never be a completed document. You should go back to it regularly, updating it with new information and data. This will keep it as accurate as possible.
And remember, if you need help with cash flow forecasting or anything else related to the finances in your business you should contact a member of the team at Gilroy Gannon.

Posted in Business Finance.