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How to Prepare A Cash Flow Forecast

Preparing a cash flow forecast for your business should be at the top of your priority list every single year because it helps businesses ensure they have enough cash to survive.

Remember, cash is king, and without it, businesses, especially SME’s, will struggle to keep their doors open for long.

However, when preparing a cashflow forecast, businesses need to ensure that it is accurate, otherwise it will not be able to help management foresee and predict potential challenges. Without this foresight, a business may fail to survive a “bad spout” within its industry, but if management have the foresight to put measures in place, this may end up being a completely different outcome.

Making a cash flow forecast does not need to be complicated – there is no excuse for businesses not taking the time to put one together. With a reliable cash flow forecast in place, (and therefore a true understanding of your cash flow journey across a year) a business should be able to avoid a cash flow crisis and navigate, through preparation any times of pressure.

A positive cash flow is a fundamental part of running a successful business and it is the only way a business can sustainably generate profit.

In addition to that, cash flow forecasts are essential if a business is going to apply for a loan at any point. Lenders will expect to see a detailed cash flow forecast in order for them to consider giving you a loan.

Businesses should try to be disciplined when it comes to managing funds and planning ahead – it is always worth investing the time. Simply put, a business needs to know exactly what is coming in and what exactly is going out. Only then can a they put measures in place to move forward and reach their strategic growth plans.


Where to Start?

Putting together a cash flow forecast is certainly not as complicated as most people may be led to believe. To strip it down to its simplest form, a cash flow forecast consists of both the outgoings of a business and whatever is being paid into it. If you are lucky enough to have been in business for a while, look at previous years to spot trends that will help you map out the year.


Step 1:

Estimate the sales your business is likely to make. You can refer to the previous sales history documents your business has from the last few years and this should help you get a feel for what your business can expect to generate over the coming weeks and months.

It is important to consider seasonal changes, as most businesses do experience peaks and troughs. If you are new to the game, you can consult industry experts and check out customer surveys to get an idea of what to expect.

If there are competitors who could potentially dominate over the next year, thanks to a new product for example, then it is definitely worth allocating them a bigger slice of the pie in your predicted sales forecast. Failing to accurately predict a change in market share can cause waves further down the line.

Using a sales forecast, work out exactly what will be entering the business. Do not over exaggerate – there is no room for optimism here, as being over ambitious may end up harming the business long term.


Step 2:

When it comes to working out the likely costs of a business, it is important to consider both the fixed and variable ones.

There will be set costs that businesses have to pay consistently, regardless of how well it is doing – examples of this include rent, salaries and perhaps equipment hire.

Variable costs are something businesses need to pay close attention to. For example, if you are a business that supplies refrigerator trucks for events, sales are going to be a lot higher during the hot summer months, when the product is in demand thanks for the seasonal change. Come winter time, the demand is likely to drop, so this needs to be addressed in a cash flow forecast.


Step 3:

The final step is to subtract all of the business’s outgoings from the incomings – this allows businesses to see what they have to work with. It demonstrates how much or little money is available at any given point and the final result will allow your business to make both monthly and annual cash flow forecasts.

This is definitely an opportunity for businesses to work out how to move forward, as they can take into account the profit from their predicted ‘best months’ and put money aside to pay for strategic plans.

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