What is cash flow forecasting and how can it help?
A cash flow forecast is a predictive tool that estimates the amount of money expected to flow in and out of the business over a specific period of time – usually 12 months. It includes all projected income, anticipated out goings and possible additional funding.
It may involve examining the best, the worst and the most likely case scenarios allowing you to make well informed and educated decisions. It gives the owner the business intelligence needed to run a successful business.
Update your forecast each day, week or month with actual figures to check if your business is meeting your expectations. Comparing your actual income and expenses with your forecast can identify areas where your business is over or under performing, highlighting variances so you can investigate and discover why the difference exists.
Updating your cash flow forecast daily gives you an edge over your competitors. That may sound excessive but when you are dealing with extreme conditions – juggling bad debts, declining profit margins and tough sales figures – having a precise hold on your cash position at all times may be the difference between surviving and sinking.
Update your cash flow forecast.
Be cynical and when it becomes apparent that a debtor is going to exceed his/her credit terms, you must update your cash flow forecast. Only with the updated forecast can you see the effects that the delay will cause your own cash flow and put you back in control of your business. Being realistic with this part of your cash flow is absolutely essential; otherwise, you could be tempted to overspend during the month, leaving a shortfall for paying salaries, rents and taxes at the end of the month. A good strategy is to under-estimate what you expect to receive in the coming month, meeting essential expenditure only, until a surplus is achieved.
Negotiate with suppliers.
You may be surprised to know it, but your suppliers may be accommodating and allow you to settle debts at a later date, particularly if you have a history of paying on time. They will certainly appreciate a call from you, rather than unexpected payment delays in the hope that they don’t notice. This is clearly not intended for use every month but in the case where expected revenue has been delayed, it may allow a cushion to prioritize other payments, such as salaries or taxes.
What effect will it have on my business?
When created and used correctly, a forecast identifies possible trouble spots or potential opportunities for the business owner. It can help with tax preparation, new equipment purchases, bulk buying opportunities or even assist with securing business loans.
It predicts the effect of an upcoming business changes or decisions. For example, hiring a new employee will increase salary costs. The forecast shows how this additional expense will have to be funded through increased sales, reduction in other expenses or short term funding. In fact, any business decision can be tested through your cash flow forecast to show the likely effects on the business.
If you are unsure of how to determine your sales targets for the following year, the forecast will show you what exactly you need to achieve to break even.
When your cash flow forecast predicts a possible future cash shortage, there are several solutions which can be actioned, given plenty of notice and proper planning. These include:
– Reduce stock – sell more, buy less.
– Agree extended credit terms from a major supplier for that period.
– Offer incentives to customers to pay on time or early.
– Contact The Revenue Commissioners to review your situation – they may agree to accept payments to be spread over a longer period.
Over-trading – the hidden risk to cash flow.
Today’s sales are, of course, tomorrow’s cash flow. However, increased orders lead to increased costs, reducing your cash flow in the short term. Accurate and flexible forecasting makes predicting the effect of a 10% increase in sales more simple. It can be worked into your forecast immediately to see if you can fulfil it without over-trading, risking either damaging or killing your business.
Use the forecast to set terms when ordering goods from suppliers – negotiate staged payments that fit with the cash flow. Or, when dealing with customers, obtain deposits for large orders that will help you get cash into the business precisely when you need it.
How to build and use an accurate cash flow forecast.
Cash truly is the lifeblood of any business. A business that is profitable on paper can fail purely due to poor cash flow management, so having a rough idea where you stand isn’t good enough if you want to run your business well.
Here’s how it’s done…
Building a cash flow forecast is not simply about adding and subtracting theoretical amounts of money or guesstimating? It’s about drilling down into the reality of your figures. It’s about adjusting and tweaking the forecast to give a very accurate vision of the company’s cash needs for the period.
The main components of cash flowing in are:
– Cash sales
– Debtors’ payments – adjusted for late payments and bad debts
– Once off finance or funding from sources such as a new overdraft, loan, asset finance, sale of assets or invoice discounting
The main components of cash flowing out are:
– Wages, raw materials, stock
– Salaries, services (electricity, phones etc.)
– Capital expenditure
– Research and development
– VAT and tax payments
– Interest and capital repayments to any lenders
An up-to-date, adaptable cash flow forecast will become your best business friend. When given the care and attention it deserves, it can be relied upon to warn you of stormy times ahead, help achieve steady growth, steer you safely through a downturn and assist access to additional finance. What more could you ask from a friend?
Brenda Jordan, ACMA CGMA BBS
Managing Director, Accounting for Growth and CloudKPI
Arrange a Free No-Obligation Meeting with Brenda. Call 
01 2764254
