Getting a better grasp on future cash flow is crucial in strategic planning. A cash flow forecast shows your business's likely future revenue and expenses. This is why we've compiled this short guide to creating your business's cash flow forecast.
Why is a cash flow forecast important?
Getting an idea of your company's cash flow in the future can inform better strategic decisions. Any cash flow problems or cash shortages can be recognized early and planned for. The cash flow forecasting process gives you an insight into your company's financial future. When trying to attract investment, cash flow forecasts can be critical proof of your business's financial situation. An accurate cash flow forecast can also be used to test potential future scenarios - you could eg analyze how your business would react to an economic recession.
How to forecast cash flow
Cash flow forecasts can look as far ahead into the future as you like. Of course, the further away a period analyzed is, the less accurate the predictions will be. Some aspects that will influence how much money is coming in and out of your account cannot be predicted fully (eg new competitors, regulatory changes, or economic recessions). It is advisable to aim for forecasts of c. 12 months into the future.
To start your cash flow forecast, you need to develop assumptions underlying your forecast. For this, you can look at the past performance of your business or even industry documents. Based on this, you then formulate assumptions about eg the positive or negative impact of seasonality, staff salary increases, estimates of an increase in sales, etc.
You will also need to develop an estimate of income generated through sales. This can, of course, be difficult to predict exactly. It is advisable to start with historic data on sales to identify trends and then make subsequent adjustments reflecting external factors influencing your sales. This also needs to consider payment timings.
There may be other cash payments incoming that you need to identify for your forecast. Other sources of cash inflow could include government taxes, tax refunds, or royalties.
Once you have looked at the cash inflows, you need to identify direct and indirect business expenses. This can include future supplier payments, staff salaries, loan repayments, or asset purchases.
Based on the above, you can then develop your business's cash flow forecast. Misuse cash outflows from cash inflows to arrive at a final cash position.
Cash flow forecasting tools
There are several cash flow forecasting software tools available online. Chat to us at Futrli to learn how our software can help provide you with accurate cash flow forecasts.