Cashflow is the life-blood of all businesses, especially so with start-ups and small enterprises. As a result, it is important that management understands what will be happening with a business’ cash flow to make sure the business has enough access to fund to allow it to survive.

How To Forecast Cashflow

Cashflow forecasting is not as difficult as you may think, here are several tips to keep in mind:

  • Forecasting is an approximation; so expecting perfection is a “no-no”. You should expect to have an error tolerance of 5 to 10 percent.
  • You need to commitment to updating your forecast regularly. This ensures that you don’t get to wander too far from your business’ actual cash position.
  • Be conservative and don’t overestimate. Rather than overestimate your cash position, it’s best you underestimate so that you can be able to plan accordingly.
  • Cashflow is all about the real cash at hand, money that is in your bank account). Any accruals and depreciation should be excluded.
  • Don’t forget to regularly test your cashflow assumptions against the actual cashflows.

How To Construct Your Cashflow Forecast
There are two basic components to a cashflow forecast – inflows and outflows (more on this below).

The division of cashflow itself should be into weekly intervals and extended for 6 to 12 months. The forecast will probably become unreliable if it extends beyond this period.

Here is the general structure for each period:

  • Opening cash balance
  • Add sales/other revenue
  • Subtract expenses
  • Closing cash balance

Cash Inflows
Trade sales are primarily what make up the inflows and they are supposed to be included when the cash is received and not the sales date. Remember to take into account all rebates or trade discounts offered to your customers.

Generally what you use in estimating future sales are plan, averages or budget, but remember it’s better to underestimate. Include such investment income as dividends or interest whenever you receive them.

“One off” items such as equity injections or loan drawdowns should be included.

Cash Outflows

  • Begin with general cash expenses such as wages and salaries, insurance, rent, lease and any contracted obligations.
  • Taxation related costs should be included. This would include all GST payments, superannuation contributions, and PAYG.
  • Costs related to sale items such as freight, costs of manufacture and logistics should be included to forecast sales – oftentimes at a certain percentage. For instance, costs of manufacture at 10 percent of sales.
  • Make use of the current spot exchange rate to change to local currency if you purchase your items in foreign currency.
  • When you pay trade payables, include them – most times, trade payables are usually paid on a weekly, fortnightly or monthly basis.
  • Make allowances for unforeseen expenses.

In summary, as soon as you have an accurate and reliable cashflow model, ensure you identify any possible cash deficits and plan accordingly.

Your cash sources can include all or any bank overdrafts, invoice discounting facilities, or business loans. It is important to note that you’ll have to plan for a lead time, if you don’t already have established cash sources to insure against any possible shortfalls as setting up new lines of credit can be time consuming.

If you’re looking to get some extra help to better understand cashflow and its impact on your business, chat to the team today.