The way you project cash flow is essential for any business whether large or small. A cash flow forecast tells you if your business will have enough to run itself or support any expansion.
Your cash flow forecast will also let you ascertain the amount of cash coming in and going out of your business. To prepare an effective cash flow forecast – it is essential to break it into a number of steps. Here are a few steps that you can follow to prepare an outstanding cash flow forecast –
- Prepare a sales forecast: To make an outstanding cash flow forecast, it is essential to first ascertain the income or sales for the business. You need to look at the sales figures for your previous year and based on your past trends – plan a cash flow forecast accordingly. Now, if your business is a start-up you need to start by estimating all your cash outflows. This will help you estimate the cash inflow that you would require to cover the outflows – thus setting a sales target for your business.
While all this sounds relatively easy, you must remember that your cash inflows also depend on factors like – your clients or customers, the condition of the economy among others.
- Prepare details of other estimated cash inflows: Your business can benefit from a number of other cash inflows based on various sources. You need to keep track and take account of such sources. Some of these sources include:
- The proprietors adding more money (in the form of equity) in your business
- Government or other grants
- Sale of an asset
- Royalties, franchise fees or license fees, depending on the type of business
- Prepare the details of your expenses: Your expenses will help you estimate your cash outflow. While you are calculating your expenses, it is important that you precisely ascertain the cost that you would incur to make the goods/ services available to your customer/ client. You need to keep in mind – the cost that you would incur as part of the administration and operations. There are also other sources for cash outflows that you need to take into account. E.g. buying new assets, loan repayments, etc.
- Consolidate the details to prepare a complete cash flow forecast: Cash flows are all about timing. You need to estimate your actual cash on hand by adding all your cash inflows and deduct the potential cash outflows for 2016. Please note that your closing balance for 2016 will be your opening balance for 2017. So plan accordingly.
Cash flow is all about timing and the flow of cash, so when preparing your cash flow forecast, make sure you are as accurate as possible on the timing of the cash flows.