cash flow forecast Archives - The Finance Team

You operate in a world that is constantly changing, where the future is difficult to predict. Your weeks are bogged down with scheduled meetings and to-do’s. With all of these demands pulling you in different directions, you might begin to ask yourself: how important is it to compile a regular cash flow forecast? After all, how accurate can a cash flow forecast be in an environment that is subject to constant flux?

The answer is: still very. The need to project cash flow needs for your business remains paramount to being a successful financial manager. This is despite the other pressures you face, and the changing environment in which you work. In fact, in some ways, it becomes more important because of these factors.

The differentiator is to spend your efforts compiling a cash flow forecast that actually works.

Here are a few pointers as to how you can do that.

1. Make sure your assumptions are realistic.

If your projections are too optimistic – or too pessimistic – the exercise of forecasting becomes futile. Within the first few weeks of your cash flow forecast, test it against your actual cash flow to see how accurate you are. If there are gaping holes, identify why they’re there. Did you forget to include absolutely all of your expenses in the forecast? Did you overlook a promotion that the company is running during this time? Change your assumptions as often as you need to ensure you stay on track.

2. Refer to your cash flow forecast regularly.

You’re so caught up in the humdrum of every day requirements that it might be difficult to fit in the time. But if you really want your cash flow forecast to work for you, make the time to review this document often – more often than you might want to! Schedule a set time in your calendar, put a reminder on your phone, and ask your PA not to book any meetings during this time. If you have a set, regular time that you are checking your forecast, you can identify cash needs in advance, and alter them against reality. When the business will be experiencing a trough, you can apply for finance or try to attract extra investment in good time.

3. Start with baby steps.

Start by producing a four-week cash flow forecast. Review it regularly for accuracy. Once you are comfortable with the accuracy of your month-long forecast, compile an eight-week cash flow forecast. Then move on to a 12-week projection, and so on.

4. Make allowance for seasonal fluctuations.

Remember to include seasonal and environmental factors in your forecast. So for example, when preparing for the cash flow forecast of the second quarter of 2011, your company would not simply have been able to base its projections on the historical data provided by the second quarter of 2010. That period of 2010 saw the Soccer World Cup come to South Africa, and with it, there were abnormal patterns in sales and consumer behaviour. Be mindful of the upcoming “irregularities” such as seasonal events, anticipated strikes or wage negotiation periods and, of course, the impact of power fluctuations caused by load shedding!

The more regularly you review, contrast and update your cash flow forecast, the more invaluable it will become. With its help, you’ll be able to maintain the most optimal levels of cash for your company, saving on excessive stock costs and ensuring that your business has the most appropriate finance in place for its needs at any given time.

If you need assistance putting together a cash flow forecast that really works for you, get in touch with The Finance Team. Our highly experienced finance executives can come into your company to provide ad hoc or part-time assistance as you require it.

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In its simplest form, cash flow is the movement of money in and out of your business. It could be described as the process by which your business uses cash to generate goods or services for the sale to your customers , collects the cash from these sales and then completes this cycle all over again, therefore, a cash flow forecast is the lifeblood of your business.

When developing your cash flow forecast it is critical to take the following into consideration:

How much cash does my business have?
How much cash does my business need to operate, and when is it needed?
Where does my business get and spend its cash?
How do my income and expenses affect the amount of cash I need to expand my business?

Before you can answer any of these questions you will need to identify if all your company financial statements, budgets and other data is accurate and up to date. Developing a cash flow forecast without this knowledge is like building a house that has no foundations, eventually it will come crashing down around you.

The best way to avoid this is to make sure you have an experienced financial manager or financial director who can prepare and interpret all the necessary information and data. The problem is that many small and medium size businesses don’t have an experienced financial manager either because it is perceived that a full time resource is not needed or the cost is simply too high. If this is the case in your business then be advised that there are reputable companies that outsource brilliant financial managers on a part time or project basis. These part time financial managers are able to quickly asses and interpret financial statements, assist with formulating budgets and develop realistic cash flow forecasts for your business.

A cash flow forecast is the lifeblood of your business

A cash flow forecast is based on a series of assumptions about the expected performance of the business in the future. These assumptions need to be realistic and supported by the most accurate data you have available. If you have access to previous trading results then the best place to start is last year’s sales and expense records. Allocate these results into similar months in which they occurred last year, unless you know they will change in the future. You may want to increase sales to account for more growth or you may know that you made an unexpected sale/expense in a particular month last year that was a one off or extraordinary item. You could be looking at introducing a new product line or service, looking to buy a new piece of equipment or employ another person/s. These will all have an impact on the cash flow budget and are the type of things you should account for so that you can forecast as accurate a picture as possible.

If you plan to use the information on your profit and loss statement, understand that these have been prepared for tax purposes and will account for non-cash payments such as depreciation. This shouldn’t be included in a cash flow budget as you don’t physically result in any cash movements.

If the business is new, then you will need to base your assumptions on research, market expectations, contracts held, known expenses such as rent or compare other similar business results. The more information you can build into the picture the stronger and more accurate your cash flow forecast will be.

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