Making Better Cash Flow Forecasts

"Cash is the lifeblood of every business" and "more businesses fail for want of cash than lack of profit." These may be cliches but they are very, very true.

A key element of controlling cash is to forecast cash flows and requirements. This entails forecasting and tabulating all significant cash inflows relating to sales, new loans, interest received etc. and then analyzing in detail the timing of expected payments relating to suppliers, wages, other expenses, capital expenditure, loan repayments, dividends, tax, interest payments etc. The difference between the cash in- and out-flows within a given period indicates the net cash flow. When this net cash flow is added to or subtracted from opening bank balances, any likely short-term bank funding requirements can be ascertained.

Typically, a spreadsheet-based plan can be used to compile cashflow forecasts, assess possible funding requirements and explore the likely financial consequences of alternative strategies. Used effectively, this plan can help prevent major planning errors, anticipate problems, identify opportunities to improve cash flow or provide a basis for negotiating short-term funding from a bank.

When planning to seek external funding, the time horizon covered by the forecasts should be equal to or greater than the period for which the funding is needed. The greater the amount of funding required and the longer the period of exposure for the provider of these funds, the more comprehensive must be the supporting projections and plan.

For short-term cash planning you should make assumptions on sales, costs, credit, funding etc. to produce monthly cash flow projections for up to a year ahead. Initial assumptions can be readily altered to evaluate alternative scenarios. For example, the plan could be used to explore the extent to which future sales could be increased whilst holding bank borrowings within predetermined limits; to assess the effects on cash flow of varying sales, costs or credit terms; or to determine the likely short-term funding requirements for a business.

Our Exl-Plan range of financial planners generate fully integrated profit & loss accounts with cashflow statements and balance sheets for up to five years ahead and Cashflow Plan is a specialist cashflow planner covering 12 months ahead, with weekly projections for the initial three months.