CASH FLOW FORECASTING and PLANNING

Posted on Posted in Business Planning

Cash FlowCash flow is the lifeblood of any business or company. If your cash flows are budgeted correctly, you should have enough cash available to pay off your business’s or company’s expenses as they occur. Having enough cash available to pay your business’s debts and to buy materials and assets is an important part of business planning.

It is not uncommon to find small businesses without an effective cash flow management plan in place, finding themselves in a situation where they are not being paid on time and then, having to cut costs or scramble to find alternative funding

Note: Cash flow should not be confused with profits and losses. You will find many small businesses and companies have gone out of business while making profits, simply because they ran out of cash.
Plan and Monitor your Cash Flow

Planning and monitoring your cash flow is one of the most important things you should d when running your business or company. A cash-strapped business or company can easily be pushed to the brink if it does not have a good cash flow management plan. The basics of cash flow management planning and forecasting is to have a good financial report (Cash Flow Statement) in place.

What is a Cash Flow Statement?

A cash flow statement is a financial report, when used in conjunction with the rest of the financial reports, provides information that will show you:

• How much cash is moving in and out of your business or company over a set period of time (i.e. it reflects your “liquidity”); and

• Whether your business or company is able to cover short-term expenses, such as bills and staff wages.

Note: You should prepare a cash flow statement monthly and at the end of the financial year.

Cash Flow Forecasting

How Comprehensive Should my Cash Flow Statement be?

Depending on the size and complexity of your business or company, your cash flow statement may only include a few items or it may include many items.

Note: By preparing a Cash Flow Statement, you will see if there is more money coming into or out of your business. Remember the crucial figure, found at the bottom of your Cash Flow statement is what is important to you, this is your net cash flow.

 

Forecast your Cash Inflows and Cash Outflows

When implementing a suitable Cash Flow Management Plan and to help you in determining your net cash flow for each month. You should forecast your cash inflows and cash outflows for each month. You can use a cash flow template to forecast your monthly cash flow. All you need to do is estimate and record the following amounts each month:

• Opening Cash Balance – this is where you record your cash available at the beginning of the month.

• Total Monthly Cash Inflow – this includes cash receipts from customers (sales), proceeds from the sale of equipment, dividend and interest revenue received, proceeds from borrowings, capital injections from owner funds, and any other sources.

• Total Monthly Cash Outflow – this includes cash payments to suppliers (purchases), replacement of equipment, loan payments, wages, telephone, electricity, and any other bills.

• Net Cash Flow – by taking the total outflows from the total inflows, you will calculate your Net Cash Flow

• Closing Cash Balance – you are now ready to calculate your funds available for the end of the month by adding the net cash flow to the opening balance. This amount will also be your opening balance for the next month.

Note: If your net cash flow is (negative), then your closing balance will be reduced.

Monitor Actual Cash Inflows against Actual Cash Outflows

It is important to compare your actual net cash flow against your forecast net cash to see if your business is tracking as you have planned. You may find that you need to adjust your forecast net cash flow due to amounts changing over the year.

Forecasting Excess Cash or Shortfalls

Forecasting your business’s cash flow each month will enable you to know in advance the actual months in the financial year when your business will have:

• Any excess in cash; or
• Any shortfalls in cash.

Note 1: If you forecast any excess in cash, you may want to put any excess cash into some form of short-term investments.

Note 2: If you forecast any shortfalls in cash, you may want to plan for an appropriate short-term business loan to cover your costs

Frequently Asked Questions (FAQs)

When considering implementing a suitable cash flow management plan and adopting effective forecasting techniques. Many business owners and key managers have frequently asked us to provide suitable answers to a number of questions. Here is a brief list of some of the most FAQs we have been asked:

 How often should I review my Cash Flow Forecast?

Your cash flow forecast should be reviewed at least monthly. This provides you with the opportunity to:

• Insert the “actual” results for each month;
• Compare forecasted amounts to the “actual” performance;
• Calculate both positive and negative variations.
• Take corrective action (if required);and
• Understand how well your business or company is going.

What is the difference between Cash and Cash equivalents?

Cash comprises “cash on hand” and “demand deposits”. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value.

What are Cash Flow Operating, Investing and Financing activities?

• Cash flow “operating” activities are the principal revenue-producing activities of your business.

• Cash flow “investing” activities are the acquisition and disposal of long-term assets, as well as cash received from their sale.

• Cash flow “financing” activities are activities that will alter the size and composition of the contributed equity or borrowings of a business.

What is Liquidity?

Liquidity is the capacity to convert a liquid investment easily and with a minimum of loss into cash. In business, liquidity refers to the ability of your business or company to meet its commitments as and when they fall due (i.e. this means having the cash available when required).