Cash flow forecast reports show the expected cash inflows and outflows of a business over a specified period. They will typically include information on projected revenue, expected cash collections from customers, anticipated expenses including salaries, rent, utilities, and other operating costs, as well as projected capital expenditures, such as new equipment or investments in the business.
A Cashflow forecast report is perhaps the most important type of cash flow report for small business owners because it builds on their profit and loss to provide a valuable cash forecast.
The concept of breakeven sales relates to the number of sales required to cover all variable and fixed costs for a period, meaning that the net profit will be $0 at that break-even amount of sales.
Cash flow breakeven takes this concept a step further and considers other cash flow requirements of the business which are not reported on the profit and loss.
The below ‘how to guide’ will help you create your own very simple cash flow forecast, which can be used to ensure your business is able to meet its cash flow breakeven requirements:
Start with your profit and loss forecast statement for a period.
-
- Remember if you’re registered for GST, your profit and loss report doesn’t include GST in the amounts reported.
- If you don’t have a profit and loss forecast, you can use a profit and loss for a historical period that may be similar (e.g. the same month from last year
After the bottom line of your report, add adjustments for add-backs and additional cash outlays
- Add back anything on your profit and loss which isn’t actually a cash payment.
Eg. Interest charged to a loan account isn’t a cash outlay so should be added back if it shows on your profit and loss.
2. Other cash outlays include anything that is paid for in cash that doesn’t show on your profit and loss statement.
Eg. Loan repayments, GST paid to the ATO as part of your BAS etc.
Tips:
- If salary and wages form part of your profit and loss report, be careful of how you treat superannuation and PAYGW. These amounts will already be included in your profit and loss so no adjustment will be required if those amounts are actually cash flowed in the same period as your profit and loss report.
- Credit card spending and timing of credit card repayments can impact the timing of cash in and out of a business, but remember this is intended to be a very simple cash flow breakeven so if you’re routinely clearing your credit card, and it’s a similar amount each month, it’s often simplest to assume that credit card repayments are already covered by the expenses showing in your profit and loss, as well as your GST adjustment.
- If your forecast shows your predicted sales increasing (or decreasing), be sure to increase (or decrease) the associated cost of goods sold (COGS) by the same %.
The end result:
The finished product will indicate whether there is a forecast cash surplus or deficit for the period. Again, noting timing can play a big role, it’s important to understand the impact of adjustments that are/are not included.
When to use these simple cashflow forecasts:
- If you are starting a new business and are in the startup phase
- Sanity checks for an existing business that is constantly cash poor.
- Routine monitoring for an existing business to ensure progress towards future goals.
