How to forecast cashflow?
Everything you need to know about forecasting cashflow.
Hopefully, you have some idea how much cash your business actually has today. Have you ever wondered exactly how much you’ll have next month? Will there be enough to run the business until the end of the year? Will there be enough then to undertake those expansion plans?
A cashflow forecast can help answer all these questions and it might not be as hard as you think to put one together. Here’s a simple guide that’ll help you get started.
Start with the balance in your primary bank account. Add any other monies you can spend. The sum of these will be your opening cash balance.
Next, estimate your cash inflows for the period. These will most likely come primarily from your sales but if you’re selling on credit terms, there will be a lag between the date of the sale and date the cash is received so remember to factor this in. Other cash inflows might include tax refunds, GST rebates, proceeds from new loans and equity contributions as well as any interest received and proceeds from any non-recurring asset sales. Remember to include any other sources of cash.
Then estimate your cash outflows. It might be easiest to start with an estimate for those related to fixed cost items such as bank fees and interest, salaries and wages, tax and superannuation, rent, consumables and so on. Then, estimate your cash outflows related to the variable cost items such as materials or inventory (and potentially wages). If you are able to purchase on credit terms, don’t forget to account for this. Also, remember to include anticipated cash payments for any plant and equipment being purchased.
To get the net cash flow for the period, simply deduct the cash outflows from the cash inflows. Then add (or subtract) the net cash flow for the period to (or from) the opening cash balance and you’ll have your estimate for the ending cash balance. Repeat this process for as many periods as you’d like to forecast.
Most importantly, at the end of each period, compare the actual net cash flows with the estimated net cash flows. Try to figure out why there is a discrepancy and use this to refine your forecasts for cash inflows and outflows for subsequent periods. This will significantly improve the validity and predictive value of your forecasts.
Now you should be able to identify periods where you are likely to experience a cash shortage. This should enable you to source funding solutions in advance, such as cashflow finance. Conversely, when you anticipate a period where there will be a cash surplus, you will be better able to gauge whether your expansion plans are feasible.
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