How to prepare a cash flow forecast

Business owners tend to focus on the bottom line: the profit we are going to make. But a business can have $100,000 in profit AND an overdrawn bank account. Why? Because of poorly managed cash flow and no cash flow forecast.

The long-term survival of a business depends on its ability to successfully manage cash, and cash flow forecasting and analysis can help with this. Here are some more reasons you should prepare a cash flow forecast: 

• A cash flow forecast can enable you to meet seasonal commitments and plan for future expenditure, e.g. on equipment.
• A cash flow forecast can show when additional funds might be required in both the short and long term.
• Cash flow problems often catch small business owners unaware and a forecast will guard against this. 

If you have not been established long, your forecast will be driven by assumptions appropriate to your specific industry or business. Industry stats, benchmarking, dealings with customers and supplies and any knowledge that you have will all play a part.

Some of the main items to focus on include: 

• Sales growth estimates.
• If your business/product is seasonal.
• Expenses that you will incur. 

Listing your assumptions within the forecast to show how you derived your figures will serve you well when assessing actual performance against forecast.

Preparing anticipated sales income

Sales can be difficult to predict. If you are in your second or subsequent year the best place to start is to look at sales in previous years to identify trends. However if you’re in your first year you will need to rely on realistic estimates based on industry benchmarks and information we mentioned above. You can also look to identify external and internal items that may affect prices within the first year and adjust accordingly.

"70% of debtors will be received within trading terms and 25% outside terms with the remainder 4% to come thereafter and a 1% provision for bad debts."

Once you have determined a sales figure, we have to look at the break down of how that money will be received and how much of that will be caught up in debtors. It is reasonable to assume the following: 70% of debtors will be received within trading terms and 25% outside terms with the remainder 4% to come thereafter and a 1% provision for bad debts. Yes, most businesses will have these so assume and provide for them so they are not a surprise.

Cash Inflows and Outflows

To complete your cash flow forecast, you need to prepare a list of other incomings and outgoings. 

Some examples of inflows include:

• GST refunds and tax refunds.
• Government assistance – for example diesel fuel rebate; apprentice payments.
• Dividends received.
• Interest received.

Outflows should include direct and indirect expenses. Some examples of these include:
Expense necessary to run the business.

• Cost of materials.
• Wages & Salaries.
• Car/loan repayment.
• Payment to any supplies.
• New equipment needed.
• Superannuation payments.
• Insurances.

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