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Simple Steps for Preparing and Using a Cash Flow Forecast


Simple Steps for Preparing and Using a Cash Flow Forecast

A good understanding of your company’s cash flow cycle is critical when drafting an accurate cash flow forecast. We provide a guideline for the whole process.

What is a cash flow forecast and why are they necessary?


Simply put, a cash flow forecast is an estimation of the money that will be going in and out of your business over a particular period of time.  Cash flow is the lifeblood of any business, especially small enterprises, meaning that cash flow forecasts provide the bedrock to financial management.  Knowing when money will be entering and leaving your company is crucial for informing financial decisions in order for your business to retain a healthy amount of cash to continue obtaining new finances.  Poor financial planning, however, is the downfall of many small enterprises, as failing to account for the rate at which cash flows in and out of your company could lead to difficulties when it comes to meeting debt payment deadlines.

A good understanding of your company’s cash flow cycle is critical when drafting an accurate cash flow forecast, but following these steps will provide a guideline for the whole process:


Step 1: Decide on a period for the forecast


The period of time that your cash flow forecast should cover is very personal to your particular business.  That being said, forecasts for SMEs generally look at a period of 3, 6 or 12 months.  However, if you can identify a time in your financial year wherein cash flow becomes noticeably tighter or more pressing, then preparing detailed estimations for shorter periods of time, such as weeks or even days, may prove very useful.


Step 2: List all of the sources by which cash comes into your company


Income is the most notable source of money entering into your business.  Calculate what money you will be receiving from customers to whom you have already provided your service and when you expect to be paid, or draft up a sales forecast, approximating how much you expect to sell based on factors such as previous years’ sales, the current economic climate and trends within your company’s particular sector.

Outside of income, other means by which cash flows into your business includes funding, such as investments, grants and loans, and sales of assets, like equipment and property.


Step 3: List all the means by which cash leaves your company


This should include all the organisations to whom you currently owe money, such as suppliers and HMRC, and the set time for payment.  Following this, you should outline the future expenditure of your business for the time period you have allocated for your cash flow forecast, which can also be used to check what costs are necessary for the running of your company and which could be cut.


Step 4: Draw up your cash flow


This can be done either by feeding your business’ outgoings and receivables into a spreadsheet or with the use of one of the many software tools that can be integrated with your accountancy software.


Step 5: Review the assumptions made in your forecast over time


It is unlikely that your cash flow forecast will be perfect the first time round, which is why it is necessary to consider the assumptions you made and how they differed from the actual outcome.  Taking note of these discrepancies will provide a highly useful reference point when creating future cash flow forecasts, and will work to increase the accuracy of each forecast over time.


Step 6: Upgrade your cash flow frequently


Once again, the influences on any business’ cash flow are specific to that one business, and these factors will determine how often you should review and upgrade your cash flow forecast.  Noteworthy variables could include your business’ investment plan, its working capital, or the rate at which you receive pay from your customers.  It’s vital that you determine the key variables that influence your company’s cash flow and look to update your forecast when necessary.

If you would like further advice on creating a cash flow forecast or managing your company’s finances, contact Voscap at 020 7769 6831 or email help@voscap.co.uk to speak with one of our business experts.

About Voscap Ltd

Voscap’s primary objective is to save your business! Our team of experts’ knowledge in restructuring and turnaround assignments is invaluable when assessing the best option available to your needs. With experience spanning several decades, we have the skill and resources to provide viable solutions within all industry sectors. All organisations go through difficult times and we are here to help. From small to multi-million turnover businesses, we have dealt with the most complex of cases. We offer an initial free assessment in analysing your financial position and providing clear and precise advice making your experience a simple non-complicated process. Get in touch →