The ABCs of Cash Flow Forecasting

Cash flow is often called the "lifeblood of a business". However the flow of cash into most businesses is uneven and there can be times when a constrained cash flow creates serious problems, even if the long term situation is positive.

There are, however, ways to improve cash flow of any small business and remove some of the worries about bills not being paid or not having enough on hand to pay wages. These mainly involve no more than adjustments to what you're already doing and so are not difficult to implement.

The first of many ways to improve cash flow of any small business is to prepare a cash flow forecast. As this will allow you to focus on areas of cash deficiencies in certain periods of the year and to implement strategies to overcome these cash deficient times.

Profit is not the same as cash

Profits may be tied up in the form of stock, inventors, debtors or assets. If these items can not be converted to cash, the business may not be able to meet its debts as they fall due. If this happens, your suppliers may take appropriate actions to cease supply of materials or services or they may take legal action for payment. This may result extremely is business closure.

Provision for GST

When preparing the Cash Flow Forecast, you need to include GST when inserting amounts for some Cash Inflows (particularly Sales for most businesses) and also Cash Outflows (particularly Purchases for most businesses). The difference between total GST inflows and total GST outflows should be calculated and inserted in the row entitled "GST Payments" (under the Other Items section in Cash Outflows).

Please note that the GST attributes of each business will vary and so, specific advice from your Accountant and Tax Advisor is strongly recommended.

How to use this Cash Flow Forecast

Step 1 – Cash Inflow

1. Calculate the Monthly Cash Flow from Sales on the Debtors Analysis spreadsheet;

2. Transfer these amounts to the Cash Flow Forecast at line (A) "Sales";

3. Sales of Assets: Use only if you plan to sell assets during the year;

4. Capital Injection: If you plan to inject your funds or borrow funds into the business;

5. Other Sources: This should include cash received other than sales, such as interest, dividends, rental incomes and rebates;

6. Total the Cash Inflows and enter at (B) "Total Cash Inflow".

Step 2 – Cash Outflow

  1. Purchases: Calculate the Monthly Cash Outflow for Purchases on the Creditors Analysis spreadsheet;
  2. Transfer this figure to the Annual Cash Flow Forecast at line (C) "Purchases";
  3. Overheads: These are taken from your Profit & Loss Statement except non-cash items such as depreciation or provisions;
  4. Divide your annual expenses into monthly payments, putting the payments into the month it will be spent eg, rent is usually a monthly expense. Motor vehicle expenses like insurance is an annual item, but registration and servicing of vehicles may be bi-annual expenses, put them in the proportional month as and when the expenses fall due. Advertising is seasonal or specific to a special event eg, an opening, Easter, Christmas and so on. Estimate bank charges, interest and all other money going out and place in their appropriate boxes;
  5. Other items. The other payments are for items not shown on a Profit & Loss Statement such as purchases of assets, loan repayments, tax payments and owners drawings;
  6. Total the Cash Outflow and place at (F) "Total Cash Outflow". To do this, add the total figures that you have written in (C) "Purchases", (D) "Total Overheads" and (E) "other payments".

Step 3 – Net Cash Flow

Calculate your net cash flow (B) – (F) and place at (G) "Net Cash Flow". This is the real test. Does money in / cash inflow, exceed money out / cash outflow?

Step 4 – Opening Balance

Put your cash balance at the beginning of the month at (H) "Opening Balance".

Step 5 – Cash at Bank

Calculate your funds available at (J) "Funds Available" by adding (G) "Net Cash Flow" and (H) "Opening Balance". Note: If (G) "Net Cash Flow" is negative then the balance of your funds available will be reduced.

Source by Tabitha Wellman

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