Understanding cash flow is the key to running a successful business. Good cash flow management will help ensure your business runs smoothly and it gives you the insight to keep on top of the financial health of your business. A cash flow forecast can also assist in budgeting for an investment in additional equipment for your business or to evaluate if you can afford to take that family holiday overseas. No business is too small to benefit from a cash flow forecast.
A cash flow forecast is an estimate of the amount of money you expect to flow in and out of your business and includes all your projected income and expenses. A forecast usually covers the next 12 months, however it can also cover a short-term period such as a week or month.
Step 1 - PREPARE THE TEMPLATE
Download our cash flow forecast basic template.
Step 2 - OPENING BANK BALANCE
Enter in the opening bank balance or input the amount of working capital that is estimated to be required at the start of the year.
Step 3 - CALCULATE CASH INFLOWS
Estimate the income per month over the next 12 months, split variable and fixed income types (if applicable). For existing businesses, look at last year's sales figures. Then decide what adjustments you will need to make based on past trends, i.e. sales increasing or decreasing, or staying the same. For a new business you should work backwards and start with the cash outflows, then you will know how much income you need to make a profit.
Note that sales figures always change as they depend on various factors, such as the types of customers you sell to, how quickly they have to pay you, what the economy is doing (e.g. interest rate increases or unemployment rates), and what your competitors are doing.
Factoring in the timing of your customer payments is also crucial, does your business operate on a cash sales basis or do your customers pay 30 days from invoice?
Additional sources of cash ('cash inflows') vary from business to business, the more detailed your forecast, the more accurate it will be. Examples are:
GST and tax refunds (we have excluded from our basic template)
owners invest more money (add extra equity) in the business
government or other grants
loans are paid back to you or you sell an asset
other sources such as royalties, franchise fees, or licence fees.
Step 4 - CALCULATE CASH OUTFLOWS
Estimate the fixed and variable expenses over the next 12 months. Fixed costs are the items that do not increase or decrease depending on sales and include items such as rent, wages, telephone etc. Variable costs are the items that increase or decrease depending on sales and include items such as delivery costs of stock and overtime wages.
Factoring in the timing of your supplier payments is also crucial, does your business operate on a cash sales basis or do you have a business credit card or payment terms whereby you can extend payment out to a month or more?
Additional 'cash outflows' vary from business to business, the more detailed your forecast, the more accurate it will be. Examples are:
Step 5 - INPUT DATA
Once you have the estimated income and expenses and factored in the timing you are ready to input the data into the template. Congratulations you now have a better picture of the timing of your cash inflows and outflows for the next 12 months.
BML Partners can assist with a detailed cash flow forecast complete with actual vs estimate comparison.
Natalie Lennon CA
02 9580 4055