Creating a Cash Flow Forecast
The cash flow forecast is a detailed report that shows the predicted movement of your cash position. To create this, you need to understand not only what level of sales and expenditure you are likely to generate, but also the timing of it. This timing determines your cash position at any point in time.
Creating a cash flow forecast is critical for you to be able to manage your cash flow and make sure your business meets all its financial obligations (and, most importantly, leaves you with some cash in your pocket). After all, as an ambitious business owner you are in business to make some money for yourself and improve your own lifestyle, not everyone else’s.
To create your cash flow forecast, start with your fixed expenditure. These are those expenses that must be paid on a weekly, monthly, quarterly or yearly basis. These can go directly into your forecast without too much thought.
You can download the Cash Flow template here.
The next area to consider is your sales/income. Unfortunately, these areas are not fixed, and neither are the direct variable expenses attached to them. You might not know the exact number of projects you’ll be working on over the next 12 months, or the scope of those projects, which makes it difficult to predict your income and expenses like the materials and labour required for those jobs.
A secondary complication is timing – not only do you not know when these projects might take place (and when the direct variable expenses have to be paid), you also can’t guarantee that the client will pay you exactly when you want.
Forecasting the timing and dollar value of your sales will depend on both historical and future factors. Some historical factors include how long you have been in business, how stable or predictable it has been, whether your business is growing or shrinking, the size of your operation and what’s been happening in the building and property market. Some future factors are whether the recent trend will continue (up or down), whether you are planning to do anything in particular to generate more business or win some large contracts (which would likely give you a fairly predictable outlook), whether you are planning to employ more workers or branch out into other areas.
You can see that there are a number of things that you need to consider and, the more you do, the better you will understand what is happening in your business and the market. The more you know your market needs, the more you can focus on providing exactly that.
Once you have put your projections in place, the next step is analysing what the cash flow forecast is telling you (you may be surprised).
Whether that is the amount and timing of sales or the amount and timing of certain expenses, your forecast will give you a clear picture of what the next 12 months will look like and will likely highlight the areas you need to start focusing on immediately. You will be forced to start thinking about which actions you will take, such as trying to cut down on certain expenses or increasing certain types of revenue streams. You may even decide that you require a capital injection, be it short-term or otherwise. Regardless of what you decide, the benefit of creating a cash flow forecast is that you will be able to make educated decisions because you will have the right information in front of you.
Without this forecast, you just might be guessing. That can be a very dangerous thing because one wrong decision can mean the difference between a healthy profit, completing a project at cost or, worse still, a loss.
It is far more effective to be able to make decisions earlier in the business process and before any potential problems arise. Being proactive, rather than reactive, will substantially increase your likelihood of success.