How Do I Create A Cash Flow Forecast?

scrabble with cash flow wordAs discussed in my previous blog, cash flow forecasting is a key management tool in any business.

But how do you prepare a cash flow forecast?

Cash Flow Forecasts (also known as a cash flow projection) can be as simple or as complicated as business needs dictate.  For the purposes of this article, I’m going to keep the forecast fairly simple.

A basic cash flow forecast will take a few hours to create, and then another hour or so each week to update.  This of course depends on your proficiency with Excel, or your willingness to part with your precious cash to purchase one of the many cash flow forecasting tools available – personally I prefer Excel as it enables full control over content and presentation so I can tailor the forecast to the particular needs of my business.

There are 5 steps in creating a cash flow forecast:

Step 1 Prepare a list of assumptions

Cash Flow Forecasts are driven by assumptions and therefore for the forecast to be useful the underlying assumptions must be appropriate to the business.

Cash flow assumptions can be based on past performance, industry publications, correspondence from customers and suppliers, etc. and generally include:

·         Timing and quantum of price increases – both yours and your suppliers’

·         Sales growth estimates

·         Impact of seasonality

·         Provision for general cost increases (CPI)

·         Provision for internal salary and wage increases

Listing the assumptions within the forecast adds credibility serves as a reminder when assessing actual performance against forecast.

Step 2 Prepare anticipated sales income

Sales can be difficult to predict, and often the best place to start is to look at sales in previous years to identify trends.  You can then identify internal (e.g. price increases) and external (e.g. economic) factors likely to impact the current period, and make necessary adjustments.

When you have determined realistic sales for the period, they need to be broken down into sales receipts (i.e. When is the cash expected to be collected from debtors?). There is often a pattern to debtor remittance (e.g. 60% within terms, 25% one month outside terms with the remainder coming in shortly thereafter).  Note: this pattern should form one of the forecast’s underlying assumptions.

Step 3 Prepare a list of ‘other’ estimated cash inflows

To ensure your cash flow forecast is complete, compile a list of all other anticipated cash inflows, for example:

  • GST rebates and tax refunds
  • Insurance proceeds
  • Additional equity contributions or loan proceeds
  • Government grants receipts
  • Cash from asset divestment
  • Royalties or franchise/license fees

Step 4 Prepare a list of estimated expenses

These should include direct and indirect expenses. The key is identifying all the expenses required to operate the business and anticipating the timing of each payment. Cash outflows relating to financing and investing activities should be included, for example:

  • Payments to suppliers
  • Wages and salaries of all staff
  • Purchase of new assets
  • Loan repayments
  • Director drawings

Bank statements are an easy way of identifying direct debit arrangements.

Step 5 Putting the information together

Simply put, a cash flow forecast is a rolling calculation based an opening cash position, adding cash inflows and deducting cash outflows, to arrive at a closing cash position.

Finally, it’s always a good idea to run some ‘what-if’ scenarios on the completed forecast to determine how much capacity your business has to with-stand unforeseen events.

See our previous post for more tips on Cash Flow Management.

Elizabeth Mawby was a former executive of Vantage Performance, one of Australia’s leading turnaround management and profit improvement firms – solving complex problems for businesses experiencing major change.


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