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How to do a cash flow forecast

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Last editedApr 20203 min read

Cash flow forecasts play a vital role in your company’s ability to conduct long-term, strategic forward planning. It provides you with an estimate of future cash flows in and out of your business, ensuring that you have a full grasp on your business’s potential future revenue and expenses. Understanding how to do a cash flow forecast is therefore crucial for businesses of all sizes. So, how do you do a cash flow forecast? Find out more about this important financial document, right here.

How can a cash flow forecast help a business?

First, it’s important to have a general understanding of how a cash flow forecast can help a business.

Cash flow forecasts have several significant benefits. Most importantly, they provide you with a glimpse into the possible future state of your company. Using these insights, you can make better informed decisions. For example, if your cash flow forecast indicates that you’ll experience tightened cash flow during the autumn, you can act immediately to lessen the impact.

In addition, a cash flow forecast is an important document for business finance, as it provides insight into your company’s future, backed by data. Investors and lenders are likely to request a cash flow forecast before proceeding with investment, so it’s always a good idea to keep forecasting in mind if you’re considering pursuing financing for your company.

Furthermore, you can use cash flow forecasting to simulate how your business would react in specific conditions. For instance – by adjusting the numbers – you can analyse how your business’s cash flow would change in the event of a recession or an economic boom. This may provide peace of mind, but can also be a much-needed wakeup call for companies that aren’t as well prepared as they should be.

How far into the future can a cash flow forecast go?

That’s really up to you, as you can create a cash flow forecast that goes as far into the future as you need. However, it’s worth remembering that the further into the future you try to make projections for, the less accurate your report is likely to be. After all, the global economy is unpredictable, and it’s not always easy to anticipate new competitors, regulatory changes, or economic crises. As a general rule of thumb, you can expect a good level of accuracy when forecasting around 12 months into the future.

How do you do a cash flow forecast?

Want to learn how to make a cash flow forecast? Although it may seem like a complex document, producing a cash flow forecast doesn’t necessarily have to take you longer than a couple of hours. There are five basic steps that are required:

  1. Make assumptions about the future – Ultimately, the success of your cash flow forecast is likely to be heavily influenced by the accuracy of the underlying assumptions. Using industry publications, past performance, and correspondence from customers/suppliers, make assumptions about the impact of seasonality, internal salary/wage increases, sales growth estimates, and so on.

  2. Prepare projected sales income – The next step is to estimate sales income. While sales can be difficult to project, particularly if your forecast goes beyond 12 months, you can look at your historic sales data to try to identify trends. Then, make the necessary adjustments by exploring the potential internal and external factors that could impact your future sales. You’ll also need to work out payment timings (i.e. when you can actually expect to receive the cash).

  3. Estimate ‘other’ cash inflows – After you estimate sales, it’s important to factor in the other cash inflows, ensuring that you’re accurately predicting when your business is likely to receive payment. ‘Other’ cash inflows include government grants, tax refunds, royalties, and so on.

  4. Calculate estimated expenses – Next, you need to estimate the direct and indirect expenses that your business may face in the future. Potential costs you need to consider include payment to suppliers, wages, loan repayments, investments, and asset purchases.

  5. Produce a cash flow forecast – Finally, you’ll need to bring all this information together. By misusing cash outflows from cash inflows, you can determine a closing cash position.

Remember, there’s a broad range of cash flow forecasting software tools you can use to create your projections, so you don’t need to do all the calculations by yourself.

How to make a cash flow forecast in Excel

If you aren’t using cash flow forecasting software, you can make a cash flow forecast using Microsoft Excel. You could also make use of other spreadsheet software options, such as Google Sheets, if preferred. Obviously, the specifics of your spreadsheet will depend on the size and complexity of your business, but generally speaking, learning how to make a cash flow forecast in Excel is pretty simple. For more detail on how to make a cash flow forecast in Excel, check out this comprehensive guide from AccountingWEB.

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