Creating cash flow forecasts

If you are looking to for advice on creating a cash flow forecast then here are a few tips and pointers.

Firstly you need to distinguish between what is ‘Revenue and Expenditure’ and what is ‘Cash Inflows and Cash Outflows’.

Let me explain this by way of an example:

When you raise a sales invoice to one of your customers there are differences between how this transaction affects profit and how the same transaction affects your bank balance and when.

Let’s say you raised the invoice on 28 November 2009 and the invoice was for £1,000 (net of VAT or Sales Tax). For profit and loss purposes you would include £1,000 in the November profit and loss account, which is very straight forward and quite obvious really. However, when it comes to recording the ‘Cash-effect’ of this same transaction you have to put a little more thought into how you record it.

Firstly, if you are a business that has to charge VAT or Sales Tax then the amount that you will receive (the Cash-Inflow) will be more than the £1,000. If the rate of VAT or Sales Tax was 15% then the amount of ‘Cash’ you will receive into your bank account will be £1,150 and not the net amount of the invoice. Also, not all customers pay you straight away and in some cases customers can take months to pay you. So let’s say that this particular customer pays you in 30-days time, which would be on 26 December 2009 (forgetting for the minute that this is in fact Boxing Day!). Therefore for cash flow purposes you would include £1,150 in the December cash flow forecast – giving you a timing difference.

Finally, you would then need to include the £150 as a ‘Cash-Out’ part of your cash flow forecast when you paid the VAT/Sales Tax to your Government, which might not be until February 2010.

There are other complications that might come into play with your profit and loss versus your cash flows and you will have a similar complications associated with business expenditure and how these interact with ‘Cash-outflows’.

The best way to prepare a cash flow forecast is to spend a bit of time planning it and reviewing what actually goes on within your business. You will also need to consider any capital expenditure you might be planning and how this impacts on your cash flow and how the depreciation of these assets impacts on your profit and loss account.

Article by Russell Bowyer

Creating cash flow forecasts

9 thoughts on “Creating cash flow forecasts

  1. It can be a bit tricky to prepare a cashflow forcast because of all the little costs that you don’t remember until later – but it is very important for people to have their eyes wide open when conducting their business, they need to understand everything that is going on, and their predicted income for the future months/year.

  2. Many businesses will be expected to prepare a cash flow forecast as part of their business planning. This means trying to plan out when costs will arise over the next year and also what they think their revenue is going to be. For a new firm, they might do this based on the market research they have conducted prior to starting in business. For an established firm, they might base their forecast revenue on what has happened to them in previous years.

  3. Companies produce cash flow forecasts for their own planning purposes as well as for banks and investors in order to obtain finance. Sometimes governments will ask to see business plans and cash flow forecasts where government contracts are being tendered for to prove company viability

  4. Who are cash flow forecasts produced for? do the government or shareholders see the cashflow forecasts?

  5. Great post. I have always touted that your bank balance is so much more important than what your income statement shows. Given today’s sour economy, watching actual cash in and out of the business is key to survival. Even with increased sales, without cash in the bank, your business can still fail. One great way to watch this is to create a cash flow forecast.

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