Cash Flow Forecasts

Definition and Purpose

A Cash Flow Forecast is a plan that shows how much money a business expects to receive in, and pay out, over a given period of time.
Cash Flow Forecasts are crucial for business planning, they help in managing day-to-day transactions and avoiding liquidity issues.
They enable businesses to anticipate peaks and troughs in their cash balance, helping them to ensure they have enough cash to cover costs and identify potential shortfalls in advance.

Receipts: This is the income a business expects to receive. It may include sales, returns on investments, loans, and any other sources of income.
Payments: This refers to all the money expected to be paid out. This can include rent, salaries, bills, repayments on loans, and any other expenses.
Net Cash Flow: This is calculated by subtracting Payments from Receipts. It shows the expected monthly change in cash and bank balance.
Opening Balance: The cash and bank available to the business at the start of the month.
Closing Balance: The estimated cash and bank balance at the end of the month. This is the Opening Balance plus the Net Cash Flow, and it becomes the Opening Balance for the next month.

Estimates: The figures used are estimates, so they may not be 100% accurate. Unexpected costs or losses could occur.
External Factors: Changes in the economy, such as inflation, or unexpected events like natural disasters, could impact cash flow.
Changes in Customer Behavior: Increases or decreases in sales revenue due to changes in customer demand may not have been foreseen when the forecast was prepared.

Reduce Costs: This is the first place a business should look if a forecast shows negative cash flow.
Increase Price of Goods or Services: If cost reduction isn’t enough, a business might consider increasing prices.
Seek External Funding: In some cases, businesses might need to look at external sources of funding, such as bank loans, overdrafts, or investments.