Business October 16, 2019 Last updated October 14th, 2019 52 Reads share

What Is A Cash-Flow Forecast?

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A comprehensive guide for a cash-flow forecast

Cash flow forecast

What is a Cash Flow Forecast?

A Cash Flow forecast is a financial document that projects the future financial position of a company by estimating the amount of money that will flow in and out of a business during a specified timeframe.

A Cash Flow forecast is a key component in designing financial strategies for a company due to its ability to provide an estimate of the financial standing of the company in the future.

Generally, Cash Flow forecasts are used to project an organization’s financial position for the next 12 months, but in some instances, it may be used for shorter time frames such as weekly, monthly, quarterly, etc. Cash if king for all types of businesses, big or small, make sure you have a good plan for your cash flow to avoid failure. If you do not have a cash flow, speak to your accountant, if you do not have one, try hiring a management accountant or an accounting firm who can help you design an effective cash flow forecast.

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 the future finances, investments and key decisions of their business.

Here are a number of ways cash flow forecasts can add value for business owners:

  1. Cash flow forecasts help businesses recognize their financial requirements to meet a certain goal or objective. By designing a number of alternate scenarios, business owners get a better understanding of how the different scenarios impact the cash flow of their business. Identifying and eliminating weak strategies early on helps business owners acquire the much-needed confidence to pursue their business interests and get better control over their cash flow.
  2. Cash Flow forecasts provide projected cash income and expenses for a business which when compared to the actual sales and expenses will tell you how the business is performing on paper and in real cash terms.
  3. Tax preparation can be very frustrating, especially for startup owners who struggle with their finances and taxes from the very beginning. With the help of cash flow forecasts, businesses can identify the financial needs of their business, for instance, short or long term business loans required, or major capital expenditure that the business expects to incur in the near future, being prepared by having a cashflow forecast will help an owner prepare for their taxes.
  4. Efficient financial management requires you to predict the outcomes of every change you introduce in your business and the impact it will have on your financials. Being prepared for unforeseen circumstances can make a huge difference in the success and failure of a business.

To sum it up, utilizing an accurate and detailed cash flow forecast results in improved decision making, enhanced problem-solving capability, compliance with government laws & regulations and efficient financial management.

If your tax bills are high, ask your accounting firm to allocate a competitive tax accountant to help reduce your tax bill and a suitable business accountant to help you develop, monitor and track an effective cash flow.

Cash-Flow types

What should be included in a Cash Flow Statement?

Your cash flow forecast should comprise of three key components.

  1. Probable sales
  2. Estimated time of payments
  3. Estimated Costs

Probable sales:

If you are planning to launch a business, and you want to make accurate predictions about the scope of your sales in the future, you may utilize the data gathered from prospective customers, other businesses in the market (probably competitors) and experts in the industry.

However, if you are already in the market, you can estimate your probable sales for the incoming time period- weekly, monthly, quarterly, by inspecting your sales record for the previous years. Identify the impact of any discount or promotion you offered on your past sales, also ensure that you identify and understand any seasonal patterns that will impact your business sales.

It’s also important to take your future business considerations and targets in the equation, whilst estimating your likely sales. Other than your sales history, you should also be looking out for emerging market trends and pricing policy changes, as they might impact your business in a significant manner.

Expected time of payments:

After you have successfully estimated your likely sales, you need to factor in the time of receipt for these sales in the forecasts. Make sure that you leave a room of adjustment of about  2 weeks while entering the expected receipt timings, as most receipts have payment terms of 2 weeks or more.

Estimated costs:

Successfully working out your likely sales in your cash flow forecasts gives you a fair projection of the amount of cash that is going to be flowing into your business. However, you also need to get some insight into the amount of cash that will be flowing out of your business in return.

Cash flowing out is your business expenses, and there are two main types of expenses that are incurred by a business.

  1. Fixed costs
  2. Variable costs

Fixed costsFixed costs are the expenses that remain the same no matter how much you earn up to a certain limit. Rent, Employee Salaries, Insurance, and Taxes are some of the fixed costs that your business incurs. It’s important to note that you should add all of these expenses in the form of fixed costs on your cash flow forecasts.

Variable costsVariable costs are the expenses incurred that are directly proportional to the production output. The more the business expands its production and service, the more the variable costs. The purchase of stock and raw materials all contribute to a firm’s variable costs. After predicting your probable sales, you can anticipate the resulting expenses in the future.

If you have prepared an effective cash flow but are not sure how to keep it updated you might want to work with your business operations team and your business accountant to work effectively on building a process to do that.

Why is cash flow forecasting important?

The key to accurate and timely cash flow forecasting is to keep it up to do date. If utilized properly, cash flow forecasts can help your business in multiple ways, some of which are mentioned below:

  1. Accurate Cash Flows can help businesses predict possible cash shortages in the future, which businesses can utilize to prepare themselves to tackle the financial uncertainty head-on.
  2. Your business cash flow forecast, if accurate and reliable, can be the key to making accurate investment decisions, which will result in happy investors and satisfied creditors.
  3. By predicting the amount of cash that will be flowing into your business in the future, you can ensure that your vendors and employees get paid on time.
Thao Le

Thao Le

Thao Le is a Senior Accounting Manager at Clear House Accountants. Having worked and grown in the industry for a number of years she is now responsible for a team of accountants, tax planners and bookkeepers, working with them to help clients from a variety of industries, grow, save money and plan for the future. Thao holds a Bachelor and Masters degree in Accounting and Finance and is currently working towards her ACCA, she is also a Xero and Quickbooks Certified Advisor. Thao believes her expertise lies in high-level tax planning, management accounting and strategic business planning based on financial performance and business analytics. Her experience, expertise and knowledge make her an exceptional contributor at clear house towards various articles and research content.

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