What is a cash flow forecast?

The survival of any business is dependent on the rate at which money comes in and goes out of the business. This is essentially what cash flow is.

The idea of a business cash flow will give the business owner an idea of how the business is doing and if there are things to be done to further improve on profits or mitigate losses.

What is a cash flow forecast?

Cash flow forecast is therefore the process of making an estimate of sales and expenses over a period as a means of projecting for profit or loss. Cash flow forecasting is done by monitoring how and the rate at which cash flows in and out of a business over a given period to make a plan for the future.

For example, imagine you are making a grocery list for shopping. You don’t know if things are more expensive or cheaper now so you make an estimate of what you expect the market values to be. This is done to ensure you have enough cash on you or on your credit card to avoid unnecessary embarrassment. That is what cash flow forecast essentially is.

Why is cash flow forecasting important?

Cash flow forecast is important for business planning which includes some of the following reasons:

1. To predict income and help in making budgets that ensure employees and suppliers are paid on time and in full.
2. To help financial institutions understand your company’s profitability and viability in case you want to seek a loan from banks and investors.
3. To help to predict a loss in which case you can be prepared.
    

How long should a cash flow forecast period be?

A cash flow forecast monitors cash flow over a period of time.

It is more efficient and realistic to do a cash flow forecast for a 12-months period or a year.

This is to ensure you plan for the slow and busy months ahead. The amounts of cash may not be exactly accurate but it must be a very close estimate.

What are positive and negative cash flows?

When a business has more expenses than income, it is said to have a negative cash flow which is essentially a loss.

On the other hand, if its income is more than its expenses, then it has a positive cash flow, i.e., a profit.

What elements make up the cash flow forecast?

A good cash flow forecast must include the following elements to be realistic and dependable:

1. Opening account balance – this is the amount of cash at hand and in the business bank account at the beginning of the business year. Since most businesses are operating cashless transactions these days, your bank balance at the beginning of the business year may be enough for this. So, you can easily access this from your bank statement.
    
2. Projected estimates of sales and income – this will include 
   
   - Receipts and Invoices. This is very important because this is how money usually comes into a business. So, all receipts and invoices must be accurately kept and documented. This will help you understand the variations over the years and make estimates on what to expect in the coming year. 
   
   - Grants – if you have received a grant for your business, you should include this in your forecast too.
    
3. Projected costs or expenses – this will include 
   
   - Overhead costs – this is important if you have employees, the amount you spend on building maintenance and stationery, as well as travel expenses.
   
   - Stock purchases of fixed assets – the buying and selling of stocks must be accurately documented as well as information on the business’s fixed assets such as furniture, computers and other electronics, pieces of machinery, buildings, etc.
   
   - Tax payments – this will include National Insurance, VAT, PAYE, Self-Assessment tax, or corporation tax.
   
   - Loan payments – where necessary, enter the amount of loan obtained and the amount you are paying back per month.
   
   - Dividends – this is important if you own a limited liability company. You must document the amounts and when they are due to be paid.
    
4. Projected payment timings – you should project when you are meant to pay your employees, suppliers, taxes, loans, and or dividends to the right quarters.
    

Conclusion

The objective of forecasting your business’s cash flow is so that you can plan and mitigate losses if and when necessary. It is like predicting the future and finding means by which you can prevent an apocalypse in your business.