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Cash flow forecasting for the future.

Planning your future financial position

Cash flow forecasting involves estimating your future sales and expenses. A cash flow forecast is a vital tool for your business because it will tell you if you’ll have enough cash to run the business or expand it. It will also show you when more cash is going out of the business than in.

What is a cash flow forecast?

A cash flow forecast is in essence a cashbook that projects you or your business’s income and outgoings for any given period in the future, eg week, month, quarter or financial year.

For each period, it lists:

  • your projected starting account balance
  • your predicted income
  • your estimating outgoings, eg bills, salaries, raw materials
  • your projected ending account balance
  • any money left over.

It’s typically presented as a spreadsheet, but many contractors, sole traders and small businesses use accounting software ( we use MYOB and Xero) and work with their accountants or bookkeepers to ensure greater accuracy. 

A cash flow forecast is only as valuable as the information and detail put into it.

Measuring your business cash flow

Your business’s cash flow is represented in a cash flow statement. A positive cash flow will have more money coming in than going out.

You can improve your cash flow by:

  • Managing your working capital (managing stock and payments to suppliers, and recovering debts)
  • Make a cash flow forecast to estimate your income and expenses in the future.

Here are a few steps to forecast your cash flow:

Forecast your income or sales

First, decide on a period that you want to forecast. Most people choose monthly.

To forecast your sales, look at last year’s figures to see if you can spot any trends. You can make adjustments to your sales forecast based on whether sales increased, decreased or stayed the same.

If you’re a new business and don’t have past sales figures, start by estimating all the cash outflows. This will give you an idea of how much money the business needs to bring in to cover it.

But keep in mind that sales figures can change all the time depending on:

  • Your customer base and how quickly they pay you
  • Changes in the economy such as interest rates and unemployment rates
  • What your competitors are doing.

Look at your cash inflows

Next, you should look at your ‘cash inflows’, or sources of cash other than sales.

  • A loan is paid back to you
  • Selling off an asset
  • GST rebates and tax refunds
  • Government or other grants
  • Owners investing more money (adding extra equity) in the business
  • Other sources such as royalties, franchise fees, or licence fees.

Estimate cash outflows and expenses

When you calculate your cash outflows, work out what it costs to make goods available. This way, if you need to adjust your sales numbers later (for example, if you actually sold 10 units in March when you thought you would sell 5), it will be easier to adjust the actual cost of goods sold.

Expenses can be money spent on administration or operation. These will also depend on the type of business.

Other cash outflows

Beyond its normal running expenses, cash leaves a business (‘cash outflows’) in other ways. Examples are:

  • Buying new assets
  • ‘One-off’ bank fees such as loan establishment fees
  • Loan repayments
  • Payments to the owner(s)
  • Investing surplus funds.

Compile the estimates into your cash flow forecast

Since cash flows are all about timing and the flow of cash, you’ll need to start with an opening bank balance – this is your actual cash on hand.

Next, add in all the cash inflows and deduct the cash outflows for each period.

The number at the end of each period is referred to as the closing cash balance. This will be the opening cash balance for the next period.

Review your estimated cash flows against the actual

Once you’ve done your cash flow forecast, make sure you go back and check what you estimated against the actual cash flows for the period. This is the most important step. Doing this will highlight any differences between estimated and actual so you can see why your cash flow didn’t meet your expectations.

If you’re not going to be bringing in enough money to sustain your business, you can then take steps to improve your cash flow.

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Resources: Thank you to the following for their content: ANZ Bank, Ministry of Business, Innovation and Employment, and Business Victoria.