How to Create a Cash Flow Forecast for Your Business - Intact
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12th January 2022 | in Blog

How to Create a Cash Flow Forecast for Your Business


How to Create a Cash Flow Forecast for Your Business

Ask any business leader their secret for success, and responsible, diligent cash management will often be the answer. Cash flow is the essence of any fruitful enterprise, helping to maintain a solid foundation on which to operate, succeed and grow.

But managing cash isn’t as simple as it sounds, and many small businesses can struggle to control their finances in the early years of trading. As such, anything you can do to bolster your organisation’s finances is worth the effort – and cash flow forecasting is among the best ways to guarantee monetary confidence in the short and long term.

In this guide, we’re taking an in-depth look at cash flow forecasting, explaining what it is, how it works, and how it can benefit your business.

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What is a Cash Flow Forecast and How Can it Help Your Business?

A cash flow forecast is a means of predicting how much money will pass through your business in the future. It’s an effective way to manage capital and plan for future expenditure and growth, while guaranteeing long-term business continuity.

Businesses use cash flow forecasting for a host of different reasons, and the practice offers a range of benefits that can support your plans for the future. By utilising cash flow forecasting, you’ll be better placed to:

  • Get a clear picture of your business’ financial health and state of play
  • Spot gaps, losses and shortfalls which could hinder future investment and growth
  • Identify areas of your business where you can afford to invest
  • Enjoy the peace of mind that you can afford to pay partners, suppliers, and staff
  • Seek additional investment from banks and shareholders with confidence
  • Plan for future losses or periods of economic uncertainty which could threaten your operations
  • Make plans for short and long-term business growth
  • Utilise reams of existing financial data to benefit the future of your business

man on his tablet at work

When Should You Create a Cash Flow Forecast?

If you’re yet to create a cash flow forecast for your business, there’s no time like the present.

Given the immediate benefits cash flow forecasting can bring to your operations, it’s something to act on without delay. This is particularly important for start-ups and SMEs whose long-term existence relies on measured accountancy and financial management.

On the surface, a cash flow forecast may sound like a nice-to-have, something you don’t necessarily have the time or resources to create. But remember that cash is the lifeblood of any business, so anything you can do to safeguard and maintain cash flow is worth the time, effort and work involved.

What Income and Outgoings Should You Include in a Cash Flow Forecast?

Accurate cash flow forecasting relies on up-to-date accountancy data and information. That’s why your first step should be to list all your business’ incomings and outgoings, taking a granular approach to guarantee accurate predictions about your future financial position.

Below, we list and define the types of incomings and outgoings which should form part of your cash flow forecast.

Incomings

  • Sales income – as the term suggests, this is the money your business makes through sales. This forms a major part of your cash flow forecast, and is also among the simplest metrics to predict since you can look at historic sales data to make accurate estimations about future sales volumes.
  • Non-sales income – sales are rarely the only form of remuneration coming into a business, so it’s important to list other avenues of income too. Non-sales income items include things like business loans, investor backing, and tax/supplier rebates. This is by no means an exhaustive list, however, and your non-sales income will depend on your type of business and the industry you operate in.

Outgoings

  • Direct costs and overheads – direct costs refer to all the things your business needs to operate successfully. This includes, but is not limited to, raw materials and supply-related costs, logistics, packaging and sundries, employee wages, and marketing expenditure. Basically, it’s anything your business needs to work, regardless of its size, budget, or number of employees. In short, it’s the costs that are unique to your business alone.
  • Indirect costs and expenses – indirect costs are those items that need paying but aren’t connected directly to your business’ operations. This includes things such as rent, energy bills, travel expenses, phone and utility bills, and other incidental outgoings. A good way to differentiate these from direct costs is to view them as general costs which all other businesses need to pay for; they aren’t unique to your business.

Listing your incomings and outgoings requires a fine-tooth-comb approach, but is ultimately the only way to ensure the accuracy of your cash flow forecasting. Be realistic, transparent, and honest about your finances, including every modicum of accountancy data that could impact your future cash flow.

Practical Tips for Creating a Cash Flow Forecast

Creating a cash flow forecast isn’t the complicated, time-consuming process you perhaps think it is. With the right approach, coupled with the appropriate tools and software, you can develop a cash flow forecasting strategy that meets your requirements – making it easy to predict incomings and outgoings over different periods of time.

Here, we offer some simple tips on how to forecast cash flow.

woman making notes on pad

Consider Who Your Cashflow Forecast is For

Cash flow forecasts aren’t always created for the benefit of business leaders. Instead, they can be requested by investors, shareholders, and banks, particularly if a firm is seeking additional investment and funding.

In situations wherein an external party has requested a cash flow forecast, there’s room to be strategic. Because while internal cash flow forecasting benefits from a pessimistic outlook, the exact opposite is true when creating a forecast for potential investors.

Of course, your forecast still needs to be grounded in reality, but it could pay to paint your figures in a more positive light. Optimistic estimates about your future income could help get your funding pitch over the line, so think carefully about what your financial situation says about your business and its future trajectory.

Rely on Historic Financial Data Where Possible

The most accurate and plausible cash flow forecasts are those which are supported by existing financial data, whether it be historic sales, profit and loss, or expenses information. That’s why we always stress the importance of accurate, consistent, and timely database management – ensuring that the operational data you accrue can be relied upon for future predictions and forecasting.

Naturally, for new and small businesses, the amount of information you can look back on may be limited. If that’s the case for your organisation, the accuracy of your cash flow forecast will rely on shrewd predictions about your products and services, chiefly how many units you’re likely to sell and when.

Of course, that’s not the only thing that can help when predicting future income. Market research, competitor analysis, and external consultancy can all be leveraged to help shed light on your business’ potential future sales and cash flow; the more you know, the better chance you have of making accurate predictions.

man making notes from his laptop

Leverage Business Software

While cash flow forecasting can be performed using a simple spreadsheet, this is by no means the best way to maximise the value and accuracy of your forecasts. Instead, we’d recommend investing in modern business software that includes a complete and fully integrated financials and accountancy feature- set to simplify and optimise the process.

What do we mean by integrated accountancy & financials? Essentially, this is an accounting tool that is part of a larger suite of business management applications, typically contained within an business management or ERP system. There are a whole host of benefits of using integrated accountancy functionality compared to a standalone solution, including improved data accuracy, enhanced data access and transparency, and streamlined process automation.

To learn more about the benefits of integrated financials, financials product overview detail, which includes a breakdown of benefits and features you can expect.

 

If you want to leverage data and insights to make accurate predictions about the trajectory of your business, Intact can help. Our business management and ERP solutions offer advanced accounts management applications, giving you greater control over your financial data. For more information or to talk to one of our technical specialists, visit the homepage or get in touch.

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