Forecasting Your Cash Flow And The Benefits To Your Business

Forecasting Your Cash Flow And The Benefits To Your Business

Cash management often gets put on the backburner, mostly because we feel it distracts us from our real passion, working on the business rather than in it. But cash management is a core part of running a successful business.

Various studies highlight that about 80% of companies go out of business due to inadequate cash flow visibility and cash flow management.

Believe it or not but using your bank balance is not the best way to manage your company’s cash flow. It is important to forecast your company’s future and look at your business in new ways. Review your cash flow, play with different scenario’s on how things can unfold over the next 12 – 36 months.

Cash Flow Forecasting And The Benefits Thereof

Cash flow forecasting is an essential tool for any business planning. It helps the owner, board, management to make informed and forward thinking, strategic decisions.

It is much like a weather forecast, with no or little guarantee that everything will work out as planned; however, it helps you prepare for what is likely based on your cash projections. Read through the benefits below:

  • Prepare: With a cash flow it is easy to identify the possible cash you will need ahead of time, so you don’t run into serious trouble. To get a realistic idea of how long the business could stay afloat, it is important to have a worst-case scenario as part of your planning. Your cash flow can be setup to act as an early warning system if updated and reviewed regularly.
  • Clarity: Compare your actual income and expenditure against the cash flow forecast to see if the business is meeting expectations.
  • Budgeting: It will improve your budgeting inputs, highlighting affordability of projects and purchases.
  • Faster decisions: Visibility and management of your cash flow can improve decision making around the board or management table.
  • People resources: Highlights affordability of new resources.
  • Pay on time: Assists with the planning of supplier and staff payments. This is usually a big headache for businesses in the growth stage, but your cash flow forecasts can reduce concerns.
  • Investor ready: Investing in a healthy business is crucial for both investors and banks and the cash flow forecast is usually the make or break

Planning on growing your business or exiting? Your journey and decision making will be a lot easier and quicker if you have a forecast alongside your business plan.


A Few Frequently Asked Questions A Forecast Can Help Answer:

  • Could we create a new offering, or develop products or services further?
  • Do we need to borrow some cash or get investments to do some of these things?
  • Can we afford a warehouse or new offices / working spaces?
  • How long before we can expand or start selling in other countries?
  • Should we be hiring staff now?
  • Will we have cash in the bank in 3-5 months?


The Cash Flow Forecast

In a nutshell, your cash flow forecast is made up of key elements. Estimated Sales and costs, this gives you your Profit & Loss forecast. You then add in your bank/cash balances and this comes together in a useful view.

  • Revenue / Sales and Cash inflow

Decide what the timeframe is you want to set your forecast for (12, 24, 36 months or more).

Consider peak on non-peak periods (e.g. Christmas, public holidays etc.) Look at historical trends to help you set the forecast. For new start-ups, use your instincts or reference your marketing plan, look at competitor’s data to give you a gauge and speak to advisors.

Remember that any other source of cash, must be added to you to your forecast too. (e.g. tax rebates, business loans, sale of assets, grants etc.)

  • Customer Payments

So, when are we expecting to see the money in the bank?

Although you will have set your payment terms you have to be realistic and add a buffer, there are always late payments which will occur. Typically a 2 week late payment buffer should be built into your forecast.

Xero has some good tips on how to manage late payments.

  • Expenditure

Costs should be recorded in the month that the business will pay them, rather than in the month they were incurred in. It is important that you keep this part as up to date as the sales part of your forecast. Outgoings are critical to forecast to see your forecast balance.

      • expenditure / costs
        • These will stay the same for a set period:
        • Payroll
        • Subscriptions / Memberships / Licenses
        • Software
        • Rent, etc.
      • Variable expenditure / costs
        • These costs will go up and down (drivers will be quantities, volume etc.)
        • Stock
        • Raw Material
        • Packaging, etc. 



    Now that you have all the ingredients, you can bring all the above together in one place (preferably easy manageable spreadsheets in one workbook, or a software tool), add your opening- and closing cash balance every month.

    With a consist increasing bank balance, your business may be secure enough to consider new opportunities or forecast expansion.

    However, if your bank balance is decreasing, you should consider revisiting your expenditure / costs or perhaps look at your pricing structure and product or look at financing options.


    Financial Sense For Business Success!

    Contact us at Beyond Financials to explore improvements on your cash flow forecasting.



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