Cash Flow Forecast – What Is It And Do I Need One?

Knowing you have sufficient funds for your business

What is cash flow forecast ?

A cash flow forecast is a term that for some reason scares a lot of people. However it is nothing more than it says – it shows the cash that you think will come in to your business and when and the cash that you are due to pay out and when. It is a prediction of your bank statement and bank balance for the future period.

How would a cash flow forecast help me?

When I start talking with business owners about their businesses and the financial information they have available, many do not have a cash flow forecast. Equally many have the same issues in terms of worrying about paying bills, meeting salary at the end of the month and struggling with investment decisions as they are nervous that they cannot afford the spend.

So is a cash flow forecast important and why do you need one?

If you realise that most businesses fail due to lack of cash, this puts the importance of cash flow forecasting into perspective.

Consider what a cash flow forecast will tell you as a business owner. It enables you to see:

• if you can afford to pay your bills
• growth trends
• operational problems (for example, if your sales are constant or increasing and you have less cash, chances are your bills are not being issued or paid or both)
• the nature of your spend (which can highlight potential savings).

In good times it enables you to know how much you can afford to pay yourself/invest. In tougher times it highlights and helps avoid real problems as you know the crunch points and can do something about them in advance. Remember, banks are more likely to lend you money if they can see you can afford to service that debt.

Realise that a cash flow forecast is prediction /an estimate and therefore it is unlikely that it will predict the future with 100% accuracy but this is not a good reason not to have one.  You will refine your process and get more accurate over time but having such a forecast could save your business now.

What should I do now?

Start preparing one today for the next 12 weeks at a minimum. Start with what you do know, your current bank balance and your regular payments out. Then judge your cash inflow from your sales levels and, depending on your business, you may need to leave a time lag between sale and receipt of payment (you will know what this is roughly for your business). Put all that information of a sheet – a simple spreadsheet or even start with a piece of paper.

Now you have a cash flow forecast. This shows you whether you can meet your required payments. If not, you can identify actions to ensure you can. If you have excess, this allows you to make that investment, go on that holiday or whatever.