Forecasting and anticipating cash flow is a prerequisite for managing your business with confidence. However, establishing a cash flow forecast can seem complicated at first and it is not always easy to know where to start. So, if you are having trouble anticipating your cash flow situation for the coming weeks and months, this guide will point you in the right direction!
In this article, we will explain how to draw up a cash flow forecast and will cover ways to identify where your money is coming in and going out, forecasting methods and tips for making your cash flow forecast a success. This powerful tool will let you say goodbye to unexpected cash holes and, as a result, grow your business more confidently. Don’t worry if you are unsure how to do this because we will give you tips and guide you step-by-step through four separate stages so that in the end you will have a clear picture of what you need to do.
The cash flow forecast is a forecast table that allows a company to estimate how much money it will receive (cash inflow) and spend (cash outflow) over a specific period of time. The information from the forecast allows the company to anticipate the development of its cash flow and act accordingly.
The cash flow forecast is made up of four main financial forecast tables:
- The forecast income statement: this shows your company’s expenses and sales
- The forecast balance sheet: this estimates the assets held by your company at the end of each year
- The financial plan: this provides information on the financing terms of your investments
- The projected cash flow plan: this shows the level of your cash flow
In fact, a cash flow plan has several advantages as it allows you to:
- Plan the volume of sales that you intend to achieve over the coming months and implement any associated actions
- Understand and anticipate your company’s low cash flow periods, allowing you to avoid overdraft fees and even defaulting on payments
- Have a better overview of your expenses, potentially enabling you to reduce business costs and save money
- Use it as a decision-making tool – this can come in handy in certain situations. For example, if you wanted to know how your company’s cash flow would be affected by buying a new machine a little earlier, you can adjust your cash flow plan to see how the purchase would impact your cash flow
Please note: even though you are theoretically able to use a projected cash flow plan over as long a timeframe as you wish, your results will be gradually less and less accurate across the period you are looking at. It is also recommended to limit a cash flow plan to the short and medium term. Generally speaking, forecasts should be used for periods of up to 12 months. Amounts should also be entered with all taxes included.
Now that you know how great a cash flow forecast is, we can move on to the hands-on section of our guide !
We will start with how to put together the first part of the cash flow plan: cash inflow. First, create a column for each month of the year that you want to cover. Then, add one row per cash inflow item that you have identified. To do this, list the payments you expect to receive – try to list everything. We will help you with this a little bit: below are some of the most common cash inflow items found on cash flow plans (note that this is not an exhaustive list).
You can break this down into cash inflow categories:
- By means of payment (cash, credit card, cheque, transfer etc.)
- By type of client (for example, if you work both with individuals and with professionals, you can distinguish between these two types of income)
- By billing type (if you charge for some of your services in cash and for others using a payment schedule)
- By frequency (you can break your cash inflow down by repeat clients and one-off clients)
- By VAT rate: for example, if you own a restaurant, you may wish to distinguish between cash inflow from drinks sales (with a VAT rate of 20%) and eat-in food sales (with a VAT rate of 10%)
- Social security rebates
- Employment bonus scheme
- Other subsidies, competitions etc.
(If your VAT to be deducted is greater than the VAT collected)
- Bank loans
- Personal contribution (e.g. capital increase)
Once you have compiled the required information for your income, you just need to do the same for your expenses.
Depending on your business, you may track your supplier spend:
- By supplier (add a line for each of your main suppliers)
- By product type (raw materials, consumables, final products etc.)
- By VAT rate (suppliers not eligible for VAT, foreign purchases, suppliers subject to 20% VAT etc.)
- By payment terms (cash payments, 30-day payments, 45-day payments, 60-day payments)
- Salaries (executives, non-executives etc.)
- Temporary workers
- Compensation for any managers
- Other employees
- Social security scheme for freelancers (social and employer contributions)
- Mutual insurance coverage (employee coverage)
- Reimbursement of transport costs
- Restaurants, tickets
- Other employer-specific expenses
- Various software
- Other subscription-related expenses
- Other premises-related expenses
- Advertising (newspapers, TV etc.)
- Search engines (Adwords)
- Social networks (Facebook ads campaigns etc.)
- Trade fairs (space rental)
- Flyers (designing and printing)
- Other marketing expenses
- Chartered accountant
- Management consultant
- Other service providers
- Professional insurance
- Other insurance
- Loan repayments
- Financial fees (account management, overdraft, movement fees)
- Bank commission (e.g. in the event of using an unplanned overdraft)
- Other banking expenses
- Corporate land/property tax
- Apprenticeship tax (financing of technical and vocational training)
- Corporation taxes
- Other taxes
If your VAT collected is greater than the deductible VAT.
- Client refunds/gestures of goodwill
- Client gifts and supplies
- Office and administrative supplies
- Vehicle and premises maintenance
- Travel expenses
- Other miscellaneous expenses
Knowing amounts that your company has previously received and paid out is good, but being able to determine future amounts is better! There’s no need to buy a crystal ball – you won’t have any use for it. So, what do you need? Just some good advice on what to do and avoid at all costs! Every month, too many businesses find themselves in trouble – or worse, disappear altogether – because of cash flow shortfalls that they might have otherwise anticipated.
The key thing is being able to plan for the next few months. So, now that you have the structure for your table, enter your initial balance from the time that you are starting the table. For example, if you are starting in February, your initial balance should appear in the February column. Then, enter your balance at the beginning of the month (which is in fact the result of what remains for you at the end of the previous month) as soon as a new month begins.
Points to consider – success factors
Relying on work you have already completed, start to identify your fixed income and expenses. Here are some examples that should help you (again, this is not an exhaustive list, so if you have any elements that are specific to your company, then add them).
For income, we can include subscriptions and repeat clients who buy from you at regular intervals and for the same amount. Similarly, if you rent out a product or service to your clients, then there is a good chance that the amount they pay to you each month is the same. In terms of fixed expenses, the list is longer:
- Salaries (as long as you do not plan to recruit; if you are increasing your workforce by one employee, for example, you can simply amend this by a factor of one)
- Various forms of insurance
- Subscriptions of any kind (telephone and internet, work-related software or cash flow management software)
- Gas, electricity and water bills (if there are any variances, these are usually spread across the year by your supplier)
- Mutual insurance coverage
- Rent for your premises
- Cleaning your workspaces (if a contractor does this)
- Repayment of any business loans
- Taxes (if these items must be subject to rate variances, you will always be warned in advance)
Once you have identified your fixed expenses, they are quite easy to plan: simply copy your current expenses back into your plan – in every column if these expenses are paid monthly, in every third column if they are paid quarterly… you can see the pattern!
Now, let’s look at the bit that is more difficult to predict: variable income and expenses. Here we are talking about uncertain cash flows. For many of them, you know that they will happen but you do not know the exact amounts. For others, you can only hope for (or fear) their occurrence. For this reason, it is advisable to rely on your figures from previous years as this leaves the smallest possible portion in doubt. If you are just starting your business, you can rely on assumptions made in your business plan (these ought to be as well-founded as possible).
Variable income includes:
- Your sales targets
- Any instances of “one-off” financing: loans, contributions, fundraising etc.
- Money from competitions (e.g. “Best start-up”) that can unexpectedly boost your cash flow
- Potential VAT credit rebate
- Any penalties for late payments (if you have had any late payments from clients)
Variable expenses can include:
- Your purchases from suppliers (the amounts can vary considerably depending on how much business you are receiving and what your business is; for a specific idea about these assumptions, try to answer the following question: What is the supplier budget that will allow me to achieve the sales targets I have set for myself?)
- Transport costs (fuel, public transport etc.)
- Exceptional costs (vital parts for the proper functioning of a broken machine, renovation of an office following a fire, solicitors’ fees following a dispute etc.)
Be especially careful when forecasting variable expenses. It is quite easy to underestimate future expenses, so we recommend that you use conservative assumptions to cover expenses that you would not have anticipated (for example, buying a machine to replace one that has broken unexpectedly).
Pay attention to your clients’ payment terms (if any). Don’t be caught out by thinking: “This client placed a large order with me in February, so I’ll show this in the cash inflow column for February.” The thing is that you had agreed that the client could pay you after 30 days. This is a fairly simple aspect but it needs to be incorporated into your plan properly to avoid errors that could get your company into trouble.
In the same way as cash inflows, you should also pay particular attention to your suppliers’ payment terms. For example, if you bought €1,000 worth of materials in March but don’t have to pay your supplier for 60 days, be sure to put this in the correct column in your table – the €1,000 should appear in the May column and not in the March column.
Take seasonality into consideration, if your business is affected by this. For example, if you run a ski rental company, don’t make your summer sales forecast the same as your winter sales forecast. If you work mainly with companies, it is very likely that August will be a “quiet” month.
Come up with multiple scenarios. This allows you to duplicate your cash flow plan to create several potential scenarios: pessimistic ones, realistic ones, or even optimistic ones. The idea is that you can compare your various forecasts with each other. For example, if you wanted to buy larger premises, what would this mean for your cash flow based on a very optimistic scenario? And what about in the worst-case scenario? Challenge your ideas by estimating their impact on your cash flow forecast to determine how viable they would be. The more you experiment, the more accurate your forecasts will be – and the less likely you are to get a nasty surprise.
You have a lot to gain from familiarising yourself with best practices, but it’s a shame if your efforts are dashed by a few avoidable blunders. Here, we have listed the main dangers you will face and how you can avoid them.
Ignoring small amounts. Alone they don’t represent much but if you add them together, they can become a strategic factor not to be underestimated. Time and time again, too many leaders are opting for the easy solution. This leads to their companies being more likely to find themselves in the red. By then, it’s too late to say: “Ah! If only I had known, I would have taken this full tank of petrol into account – and the meal at the restaurant that I treated my colleagues to the other day!” We recommend allocating a significant budget (around 2–5% of your turnover) to a “Miscellaneous” category.
Failing to update your cash flow forecast. Yes, you have a table that is mostly exhaustive, but a number of parameters are variable, and some don’t even exist yet. Don’t rest on your laurels, because a cash flow plan is anything but fixed – it’s a living tool! Remember to track your cash flow at least once a month. The reality will inevitably differ from your forecasts (nobody can tell the future, after all!), but don’t forget that this is an exercise that you will complete multiple times, and the more frequently you update your assumptions, the more accurate your forecasts will be. For example, you’re going to win new contracts (or at least you hope that you will) and new clients mean more income. On the flip side, you may need to purchase a new vehicle earlier than expected. If this happens, you will need to add it to your table to make sure that your forecasts are as accurate as possible at all times.
Failing to take the risk of late payments into account. Payments are a key element in your cash flow plan, so you can find yourself in trouble if you ignore late payments.
Do your forecasts look good? Even in the worst-case scenario? “Great, I can go ahead and acquire new premises, buy some vehicles, hire some new staff, buy new computers…” – STOP.
Managers can sometimes paint themselves into a corner by getting carried away. If your cash flow reserves are healthy, that’s great but don’t start to spread your resources too thin. Every penny you invest must pay you back at least as much as you have spent.
So, before making a decision, ask yourself the following three questions:
- Is this purchase really necessary?
- If it really is necessary, is this the best time to make the purchase? (Sales might be starting soon!)
- Can I measure (and therefore quantify) the return on investment (ROI) of this action?
- If the answer to everything is “Yes”, then it is probably a worthwhile investment. If not, take some more time to think about it!
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Agicap allows you to:
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