Preparing a Cash Flow Forecast

Defining Cash Flow Forecast

A cash flow forecast is a financial document that predicts a business’s income (incoming cash) and expenditure (outgoing cash) over a specific period of time.
It is vital for managing the business’s liquidity by ensuring it has enough cash to meet its commitments like paying suppliers and employees.

Components of a Cash Flow Forecast

Inflows: This refers to the money that comes into the business. Example of inflows can include sales revenue, loans, and investments.
Outflows: This represents the money leaving the business. Examples of outflows can be rent, salaries, utility bills and raw materials.
Net cash flow: Calculated as inflows minus outflows, this represents the business’s cash position at the end of each period.
Opening balance: This is the amount of cash the business has at the start of the period.
Closing balance: Calculated as the opening balance plus the net cash flow, this is the cash the business will have at the end of the period, and becomes the next period’s opening balance.

Benefits of a Cash Flow Forecast

Helps businesses to plan ahead, ensuring they have enough cash to cover their outgoings.
Identifies potential periods of cash shortages so pre-emptive measures can be taken.
Can support applications for business finance by showing the business’s expected profit and cash position.
It helps the business monitor its performance by comparing actual cash flows with forecasted ones.

Limitations of a Cash Flow Forecast

Cash flow forecasts rely on estimates, which might be inaccurate if based on incorrect or unrealistic data.
Unexpected costs or losses, such as damage to equipment or loss of a key customer, are not accounted for.
A Cash Flow Forecast does not consider non-cash transactions, such as depreciation.
This document focuses on liquidity, not profitability. A business could have a positive cash flow but still be making a loss overall.

Remember, preparing accurate cash flow forecasts is an essential financial strategy for every business. It provides insights into the cash position of the business, helping to make sound financial decisions and ensuring the business can keep running.