How to Create a Cash Flow Forecast

Jun 20, 2022 | Small Business Finance

Cash flow is one of the most critical factors in the success of any business. Forecasting your cash flow enables you to take steps to ensure you have enough liquidity to capitalise on opportunities and grow your business. Key Cash Flow Statistics:

  • 63% of Australian small businesses experienced cash flow problems over a 12-month period.
  • Australian small businesses miss out on opportunities worth billions a year due to insufficient cash flow.

A cash flow forecast helps you to predict times of cash shortage and surplus. This information is vital for making informed decisions around business finance, growth opportunities and tax considerations.

Forecasting Financial Outcomes

You can use a cash flow forecast to predict the impact of potential changes on your business. For example, if you hire a new staff member or purchase new equipment, you can see how the additional expense will impact your cash flow before finalising the decision. By plotting the best and worst-case scenarios, you can anticipate how your cash flow will be impacted if you see an increase in trade or an unexpected expense. These insights can help you to feel confident when taking steps to grow your business.

Creating a Cash Flow Forecast

The best way to create a cash flow forecast is to break the process down into three manageable steps. Before you begin, you need to decide on the period duration you will be forecasting. Many businesses choose to use a monthly cash flow forecast.

Step 1: Estimate Sales Cash Inflows

The starting point for your cash flow forecast is to prepare your anticipated sales income. This is a breakdown of how much income you expect to receive from selling your goods or services over a set period. Looking at previous years sales figures should help you to identify trends and provide a good indication of expected sales. You need to take into consideration any factors that are likely to impact sales income for the period you are forecasting. This can include any price reductions/increases at your business, and any external factors that are likely to impact your sales revenue. For example, if you operate in an industry that sees seasonal peaks in demand, you need to count any increases in trade or quiet periods. It’s also important to factor in any changes to your business that may impact your cash flow. For example, if you are launching a new product, you need to conduct market research to estimate how it will affect your sales revenue. Once you have estimated your realistic sales for the forecast period, you need to determine when you can expect payment to be received from your debtors. Sales revenue can only be accounted for as cash inflow when your business has collected it. Late payment of invoices by big business is a problem for over half of Australian small businesses: According to Xero SBI data, over half of Australian small businesses are regularly paid late. If your business struggles with extended payment schedules and late invoices, debtor finance can be an affordable way to access a line of credit by leveraging outstanding accounts.

Other Sources of Estimated Cash Inflows

Sales revenue isn’t the only source of earnings for many businesses. You should also include all other anticipated income for the forecast period. These can include:

  • Tax refunds
  • GST rebates
  • Government grants
  • Royalties
  • Franchise fees
  • Insurance claim payments

Step 2: Prepare a List of Estimated Cash Outflows

Estimated cash outflows should include all of your business’s day-to-day expenses. The payment dates of some expenses are more straightforward to determine than others, but you should try to be as accurate as possible with your predicted cash outflows. Estimated expenses can include:

  • Payments to subcontractors
  • Payments to suppliers
  • Staff wages
  • Direct debits
  • Property rent/mortgage
  • Business rates/taxes

Once you have estimated the day-to-day expenses of running your business, it’s important to consider the other costs that your business may encounter. Other Sources of Estimated Cash Outflows Aside from day-to-day operations, there are a number of ways that your business may spend money, including:

  • Purchasing new equipment/machinery
  • Finance repayments
  • Payments to owner
  • Hiring new staff
  • Insurance payments

Bring Data Together in a Cash Flow Forecast

You should have already decided on the period your cash flow forecast will cover. To create your cash flow forecast, you need to determine your opening cash balance – the amount of available cash at the start of the forecasting period. The next step is to add all of the cash inflows for the period from step 1, and then to deduct all of the cash outflows for the period from step 2. This will show you how much cash balance you will have left after all inflows and outflows of cash have been accounted for. The amount left at the end of this forecasting period is your closing cash balance. This amount will also form the opening cash balance for the next forecasting period. If you find that your cash balance is lower at the end of the forecasting period, it’s an indication that your business is cash flow negative and you may wish to improve your finances by cutting costs, increasing sales, or accessing business finance to cover a cash flow gap. If your cash balance is rising, it shows that the business is cash flow positive and in a good position to expand and explore new opportunities for growth.

Comparing Your Cash Flow Projection to Financial Results

A cash flow forecast helps you to analyse the financial performance of your business. It provides a benchmark for you to judge whether your business is meeting financial expectations. For a cash flow forecast to be effective, you need to make regular updates to your data to ensure that your projections are accurate. If your business doesn’t perform as well as you anticipated, you need to investigate why. It could be due to a new competitor, increased pricing from suppliers or a combination of factors. Proactively monitoring your cash flow enables you to identify risks and make informed decisions about your business. For example, many businesses have hidden assets that can be leveraged to improve cash flow.

Securing Business Cash Flow

Cash flow forecasts can also help you determine when you should look to raise business finance to promote sustainable growth. If you are looking to expand your business by making a new hire or purchasing new equipment, cash flow forecasting is invaluable for estimating the financial impact on your business. This is also true for periods where you experience a cash flow gap. If you are experiencing issues due to extended payment terms or your expansion plans are restricted by lack of liquidity, we offer a range of flexible finance solutions to help businesses access the capital they need to grow. Speak to us today to explore your funding options. Feel free to contact us for anything that relates to your business finances so we can help with your success.

Feel free to contact Accrutus Capital on +61 02 9006 1327 to discuss our capital raising services and working capital finance to fund your growth.

Related Articles