Advivo Partner, Dale Edwards, outlines the basics of cash flow forecasting to ensure your business is set up for success.
Cashflow is the lifeblood of every business. Without it, businesses fail. With it, businesses can plan and work towards their expansion goals. So, how do business owners ensure that they know their cashflow, and can manage it effectively? They need up-to-date financial reports and effective cash flow forecasting.
Today, we are going to look at some basics of how to forecast cash flow. At Advivo we use sophisticated modelling to prepare a 3-way Forecasting Report (based on Profit & Loss, Balance Sheet, and Cashflow) suitable for supporting robust finance applications, but it doesn’t always need such a complicated approach.
What will I need to do for a cash flow forecast?
Firstly, you’ll need to have access to your business’s historic financial records including access to your Xero file or similar. Then you’ll need a big cup of coffee or similar and a spreadsheet to get started.
Simple business cashflow forecasting for the next month
Start with your current bank balance and put that at the top of your spreadsheet.
Next, you’ll need to look at what recurring income and expenses you have each month. Get these onto the spreadsheet in date order. Below are some examples of things you might need to pick up.
For your income:
- Any repeating income that is quantifiable and regular; and,
- Estimate of other income that you expect to receive payment for during the month.
Remember to assess based on when you expect to be paid and not based on when you invoice. Use your payment terms or history of how much longer your customers take to pay to assess this.
For your expenses:
- Staff/owner pays
- Rent
- Product/Material suppliers
- Regular recurring other supplies (anything on a direct debit, etc.)
- Any bank/finance payments at the time they occur each month
- Anything else that is regular, put it down so it’s a placeholder.
This is quite a granular exercise so expect to have to dig around a bit through your historic data to create something that is reasonably accurate. Remember it doesn’t need to be perfect as it’s a forecast, however the more accurate it is, the more confidence it will give you.
Once you have all this data on your spreadsheet, you should do a running total down beside the amounts to show your current cash position after each item occurs throughout the month. This will then let you know what your forecast cash position is on any day.
Forecasting cash flow beyond the next month
The further you project your forecast forward the harder it will be for it to be accurate. In saying this, to take your forecast past one month we suggest copying your one-month forecast to a second month and then adjusting for the items that will change.
Things to watch out for here include items that don’t arise every month such as regular quarterly or annual payments to the ATO for BAS, Superannuation, and annual insurance or renewal-type payments.
There is no reason why you can’t extend your forecast month-by-month for 6 months, 12 months or even indefinitely. You’ll need to review each month (and probably several times throughout the month).
This sounds like a lot of work – why am I doing this?
Forecasting your cash flow isn’t easy. How much time you spend on this depends a lot on what is motivating you to forecast in the first place. If it’s because money is tight, then you will likely be reviewing your forecast weekly, if not daily.
On the other hand, you may only be forecasting to see if you can detect any periods in a longer timeframe where cash becomes short ahead of time, so you can work to establish how to get through these times, without it being a last-minute unpleasant surprise. That is why you are forecasting so that you have time to find options to fund these short-term challenges.
If you’re finding this is too complicated or time-consuming and you need to do a more advanced cash flow than the above, please get in touch with us so that we can help you build a model to meet your needs.
You can find a sample of our 3-way Forecasting Report here.
