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By: Fulllstack Advisory – www.fulllstack.com.au – the Business Advisory experts.

What is a cash flow forecast and why are they popular?

Cash is the be all and end all for most small business owners in keeping the doors open and paying the way for new employees, new office furniture, internet, taxes and so the list goes on. Forecasting where your cash position will be in the future is crucial to making purchase decisions and any business transaction in general.

Cash flows forecasts quite simply is estimating the money inflows and outflows of your business over a given period. Businesses routinely make cashflow forecasts to ensure they have enough funds to keeping operations running smoothly as well as plan for new investments.

Cash inflows include:

  • Cash received from customers
  • Refunds from the ATO
  • Interest received from the bank
  • Refunds on sales made

Cash outflows can include:

  • Cash paid for supplies
  • Payments for wages
  • GST paid on supplies
  • Money taken out of the business by the owners

Cash flow forecasts don’t need to be overly complex but if done manually can be time-consuming.

Forecasting over 12 months on a monthly basis is generally the norm for business with a healthy cash position. However if cash is tight, then perhaps preparing a forecast over 30 days with weekly or even daily balances will be appropriate.

Short-term cash-flow forecasts

For instances where you are forecasting no more than a month, make a list of what you’re currently owed by customers and estimate when these amounts are to be paid. Add to this any new sales you expect to be paid out in this period, plus any other receipts that may occur (refunds, interest income, etc).

Next, prepare an estimate of the expenses that will be paid in the period. Payments to suppliers, lease repayments, wages and the like.  Also be sure to include any irregular amounts that will be paid; such as annual registrations or GST instalments. Collating all this information together; the incoming receipts less the outgoing payments along with your existing balance will give you an indication of where your bank balance will be in the next few days.  Excel is generally the tool of choice for doing this.

If you see the balance as being negative, then this suggests you’re heading into a cash-flow problem. Review the forecast and see where you can improve the figures – can certain customers be ushered to pay? Can payments be delayed? More sales be made? Although be wary of delaying some payments, such as ASIC fees, and superannuation payments as penalties can quickly apply.

Preparing a longer-term cash-flow forecast

Similar principles apply when forecast cash-flows for the long-term.

Starting with a copy of your annual budget, adjust this to take into account expected timing of receipts and payments. Apply the same process that you would for a short-term forecast, only do it monthly over the course of a year. Small businesses often get caught with cashflow issues because no budget is in place. If one isn’t yet created for your business, now is a great time to have one created!

Excel is also a fantastic tool for the long-term cashflow forecast, but there are also many decent third party software providers which extract information from your accounts to prepare both cash-flow forecasts and budgets.

How accurate will my cash flow forecast be?

It’s unlikely you’ll ever have an absolutely correct forecast, however the usefulness of the forecast still trumps this factor. You’ll be able to predict whether cash flow problems arise, and plan with confidence. This in itself, removes a deal of stress from business owners.

Fulllstack Advisory prepares important intel as such as cash flow reports and budgets for clients on regular basis as part of their tailored CFO services. Contact the team for financial reporting tailored to your situation today on 1300 887 627.