Cash Flow Forecasting

Forecasting the Impact of a Financial Decision

Cash flow forecasts are essential for effective financial management

When will cash be coming your way?

© iStockphoto/mgkaya

As individuals, we can often "muddle through" if we run out of cash in a month – we quickly arrange a bank loan or overdraft, or put purchases on a credit card.

Businesses often struggle to do the same, partly because the amounts of money involved are usually much larger, and partly because it's often difficult to raise a lot of money quickly.

Cash is the lifeblood of most businesses.

It's the money that you have easy access to, and that you use to pay staff, tax authorities, and suppliers.

If your business doesn't have enough cash to pay these people, it may fail within only a few days.

To keep your business healthy, you need to understand how much cash will be coming into it, and ensure that your outgoings are comfortably lower than these cash incomings. Cash flow forecasts (also known as projections) help you do this. They help you make informed decisions about the future of your business, and proactively arrange finance, where this is necessary.

In this article, we'll look at how to forecast cash flows using a spreadsheet.

Note:

This article is intended to help non-financial managers understand cash flow forecasts. Where you are relying on cash flow forecasts for business purposes, ensure that they are prepared by appropriately qualified finance professionals.

About the Tool

Cash moves in and out of a business in three ways:

  1. Operations (for example, by making sales or by purchasing supplies).
  2. Financing (for example, by taking out new loans or by repaying them).
  3. Investing (for example, by selling or purchasing assets).

Cash flow forecasts show how you can expect cash to move through your business in these ways.

With a cash flow forecast, you can:

  • Model a new business or project to check that it's viable.
  • Check that you will have enough cash to pay your staff and suppliers, and cover operating expenses.
  • Anticipate shortfalls in cash and either plan your operations accordingly or arrange finance to cover the shortfall.
  • Determine your borrowing needs and plan for capital investment.
  • Monitor money owing (receivables) and money owed (payables), and manage stock to make the best use of cash.
  • Plan investment strategies to ensure that you can earn the best-possible return on spare cash.

Note:

Cash flow forecasts record money flowing in and out of your business or project over a number of periods of time.

They will not show your reported income, as this is affected by wider factors such as depreciation (how the cost of an asset is allocated by accountants) and amortization (where large payments are spread over several periods of time).

To learn the basics of financial reporting, and to understand more about financial terminology, read our articles on Understanding Accounts: Basic Finance for Non-Financial Managers   and Words Used In Financial Accounting  .

Setting Up a Cash Flow Forecast

The steps below show how to set up and fill in a projection spreadsheet.

We've based our example on a small, fictitious restaurant called "Dinner's On Us." We've imagined that the managers rent a one-story premises for the restaurant. They have invested $5,000 of their own capital in the business, and they have also received a $2,000 bank loan at the start of the calendar year to finance the purchase of new kitchen equipment.

In our example, at the start of the new calendar year the owners launched a new service, delivering lunch platters to local businesses for meetings and corporate events. They bought a van for these deliveries, with the aim of covering its costs within six months.

Follow the steps below to set up your own cash flow forecast spreadsheet, using our example as a guide...

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