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Businesses with healthy cash flow can plan for future growth, while ones that have cash flow problems may struggle to stay afloat.
The cash flow forecast, then, is designed to help you assess how much money you’ve got coming in and going out of your business over a certain time period.
As well as helping you make decisions about what you can afford, you’ll be able to address any cash flow problems ahead of time.
A cash flow definition is simply the money that you have coming into (and leaving) your business.
Otherwise successful businesses can quickly start to struggle without easy access to cash, so understanding cash flow is one of the best ways to plan – both for when business is booming and when it might not be so great.
For example, businesses with staff still have wages to pay, even if they go through quieter periods when cash isn’t coming into the business.
A cash flow forecast helps that business understand when it might suffer those quieter periods, so it can be prudent with its money at other times of the year.
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Money that comes into your business is considered cash inflow. The largest portion of inflow is usually through product sales.
It could also be money that enters your business through a return on an investment, or the sale of assets.
Cash outflow is the money that leaves your business. Examples of cash outflow include:
Other types of outflow are costs like loan repayments or buying business insurance.
A cash flow forecast shows your best estimate for the amount of cash coming in – and leaving – your business over a specific period (usually a year). You’ll need to plot timings too, so you can plan for both busier and quieter months.
A cash flow forecast is an important part of the business plan – it helps prove viability, especially if you’re looking for investment.
A year is a good time period to forecast, because your figures beyond that might not be realistic. While your cash flow forecast should be your best estimate, it doesn’t need to be accurate to the penny, so use round numbers.
You should also update your cash flow forecast if you perform differently than expected – both positively and negatively. If your plan is out of date, it won’t be of any use to you.
Your cash flow forecast doesn’t have to be too complicated – essentially, you need 12 columns (one for each month), with space to add both the money coming in and going out during that month (you can split this out in the rows underneath).
Each income or expenditure type should also have its own row. For example:
If you set up a cash flow forecast using spreadsheet software (like Google Sheets or Excel), you can use the SUM function to add up the values in each column for the total at the bottom.
The useful information is your monthly closing cash balance. If it’s negative or close to zero for one month, this might be a problem. If it’s like this for a number of months, it’s likely that you’ll have to rethink your business model. It can be hard to track these trends over time, but using a balance sheet template can make things easier.
You’ll need information from other forecasts, such as your pricing strategy, sales and costs forecast, and your profit and loss forecast, to help inform your cash flow forecast.
Many accounting software packages also include cash flow forecast functionality, which should automate much of the process for you.
Here's a cash flow example for you to get an idea of the layout.
We’ve already hinted at many of the benefits of a cash flow forecast, but to summarise:
While planning and forecasting mostly puts your business at an advantage, there are a couple of drawbacks to using a cash flow forecast. The first is that if you use unrealistic numbers, it won’t give you an accurate forecast. Be honest and use your best estimates.
The second is true for all forecasts, including a break even analysis – it’s only your best estimate. Running a small business can be unpredictable, so you’ll need to adjust your plan accordingly. That being said, your cash flow forecast should help you remain resilient during the tougher times.
Yes, a cash flow statement is different – although the fundamentals are the same.
The cash flow statement shows a business’s cash inflows and outflows over a particular period of time, but it’s primarily a statement used for financial accounting and reporting rather than business planning.
This means it reports on what’s actually happened, instead of trying to forecast the future.
In financial accounting, businesses produce statements for public use, which customers, suppliers, and investors can use to assess how well a business is doing.
Cash flow analysis can help you make changes to improve cash flow. If you’ve identified a potential problem, these tips can help you solve it:
Do you have any tips for creating a cash flow forecast or improving cash flow? Let us know in the comments below.
Sam has more than 10 years of experience in writing for financial services. He specialises in illuminating complicated topics, from IR35 to ISAs, and identifying emerging trends that audiences want to know about. Sam spent five years at Simply Business, where he was Senior Copywriter.
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