Managing Cash Flow - Forecast

One tool that is very useful in effectively managing cash flow is a Cash Flow Forecast. A good forecast encourages you to think ahead and plan for ways to finance cash shortages or deploy surpluses before they occur. A cash flow forecast also helps in assessing the actual performance of the business against expectations.

The forecast is usually for a year or a quarter in advance broken down by week or month. Shorter term forecasts are likely to be more accurate than longer term forecasts. So how do you go about preparing a cash flow forecast?

STEP 1 – OPENING CASH POSITION
Establish your current cash position. This is the money in the bank or in short-term deposits and forms the opening balance

STEP 2 – CASH INFLOWS
Estimate the money you expect to receive during the period. This includes payments from customers, money from cash sales, funds from disposal of assets, funds from shareholders and other cash inflows. It is important to note that the focus is on collections not sales. Historical customer payment trends are a good starting point in making the estimates.

STEP 3 – CASH OUTFLOWS
Forecast your cash payments starting with payments to suppliers, salaries and staff costs, rent, vehicle running costs and other business expenses. Also factor in here loan repayments, taxes and other scheduled payment commitments.

STEP 4 – NET CASH FLOW
You are now able to compute your net cash flow position which is the balance derived from adding opening cash to cash inflows and deducting the cash outflows.

In closing, it's important that your projections be as realistic as possible in order for the cash flow forecast to be useful as a business planning and monitoring tool.