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How to Create a Cash Flow Forecast

two business managers viewing a cash flow forecast

A cash flow forecast is a good way to stay on top of cash flow, one of the biggest challenges for small businesses in Australia.

In times of uncertainty, having a clear view on cash flow is critical in business. That’s where a cash flow forecast can be invaluable. 

Take it from Richard Branson: “Never take your eyes off the cash flow because it’s the lifeblood of business”. Given the importance of cash flow, here’s a short guide on how to create a cash flow forecast.

Defining cash flow

First, let’s define our terms. If you’re not familiar with it, cash flow is simply the amount of money (cash) or cash equivalents that move in and out of business. Basically, the increase or decrease of the amount of cash a business holds. 

Cash flow is a key factor in working out the viability of a business. If you can generate positive cash on a regular basis, you’re more likely to be successful in the long term.

When you forecast your cash flow, you’ll be able to estimate your cash position on a monthly basis to see when it will be positive or negative. Then you can take steps to prevent or cover predicted shortages.

Take note, cash flow is not the same as working capital. By definition, working capital is the difference between a company’s current assets and liabilities. 

Taking cash flow forecasting steps

Check your past income and expenses and use this information to estimate cash inflows and outflows during each week or month of the year. That’s your cash flow statement. This will be much simpler to create if you’re already using accounting software. 

You can use your cash flow statement as the basis for your cash flow forecast. Another cool business tool is a cash flow forecast template. All this needs to be is an Excel or Google Sheets document that captures all your biz income and expenses by category. Good stuff.

Preparing the cash flow template

Here’s a sample cash flow template with typical income and expense categories. The categories for your income and expenses will probably differ. 

The challenge is to predict what your sales and expenses will be in the future. Although you will have historical data, your income and expenses can change over time. So keep in mind that your cash flow forecast will be an estimate. 

Predicting your cash receipts

Start by looking at the past few years of sales and other ways your business generates cash. If you have a seasonal business, you’ll want this reflected in your monthly cash flow figures. Consider the factors that can cause fluctuations in your income throughout the year, such as holidays, weather and new product launches. 

Besides a sales forecast, you’ll want to consider how long it takes to get paid (if you offer credit terms). Not being paid on time after invoicing clients will have a negative impact on your cash flow. One way to forecast this is by looking at your average debtor days. This metric shows you how long it takes on average to get paid. Learn more in What Are Debtor Days and How Do You Calculate Them?

In addition to sales, include all other ways your business generates cash. This can include income received from investments and rent of premises owned by the business.  

Estimating your cash outflows

Forecasted expenses for each month are included below the income items on the spreadsheet. Past expenses are the best guide to the future. Also, keep in mind any potential medium-term and long-term expenses that may pop up. For example, if machinery or equipment needs to be upgraded, this will increase the estimated expenses in your cash flow forecast. 

As your business grows, your expenses often increase as well. This can include additional salaries for new staff or new office equipment. As you estimate your future monthly expenses, consider the impact of this as best as possible. 

Adding figures to the cash flow forecast template

Once confident with your estimates, include them in the cash flow forecast template for each month. The net difference amount at the bottom of the spreadsheet will show you if your cash flow will be positive or negative for particular months.

Negative cash flow? Positive solutions.

Where there’s a will, there’s often a way to turn negatives into positives. If you’re facing a cash flow crunch, or simply have cash flow concerns, you’re never alone. According to Xero Small Business Insights, between 50 and 60 per cent of businesses are cash flow positive for most months throughout the year, yet this number dips to less than 50 per cent of businesses at certain points. 

There are many ways to get cash flow back on track. Keep positive and focus on solutions, such as the following:

  • Decrease your expenses by cutting back on non-essential spending to avoid going into negative cash flow territory.
  • Increase your business income by raising prices to boost your sales volume. 
  • Manage assets and staff with the view of lifting productivity and boosting revenue. 
  • Collect outstanding debts faster and decrease average debtor days through a SME payments solution.

Tap into business finance and overcome short-term cash flow concerns. Learn about small business loans from Moula.

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All the thoughts, ideas and musings from the Moula team! Covering everything from work/life balance to general finance tips plus everything in between!

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