The Importance of Cash Flow Forecasting
Cash flow forecasting is a critical part of running a business. This is especially true for small businesses. Even a profitable business can run short of cash. Forecasting cash flow is essential to make sure your business has enough to survive. Some of the main reasons cash flow forecasting is important include:
- Identify potential cash shortages in advance. This is the most important reason for doing a cash flow forecast.
- Keep employees and suppliers happy.
- Identify any problems with customer payments.
- Banks or other lenders may require a regular forecast
Steps in the Cash Flow Forecasting Process
The following are all the steps in the cash flow forecasting process:
- Prepare a sales forecast. Existing businesses can look at sales figures for the last year. Try and determine what adjustments need to be made based on past trends such as sales increasing or decreasing at certain times of the year. For a new business, start by estimating all the cash outflows so you will know how much is needed to cover the cash going out and get an idea of the sales you will need to cover it.
- Prepare details on any other estimated cash inflows such as tax refunds, franchise fees or anything else.
- Prepare details on all estimated cash outflows and expenses. Determine what it costs to make goods available. Expenses might be money spent on administration or on operations. Expenses will depend on the type of business you are involved in. Other cash outflows. Aside from normal operating expenses, cash flows out of a business for other reasons such as:
- Buying new equipment
- Loan repayments
- Payments to the owner/s
- Investing surplus funds.
- Prepare your cash flow forecast by putting all the gathered details together. Start with cash on-hand, then add in all the cash inflows, and deduct the cash outflows for each period, usually by month. The amount you have at the end of each month is called the closing cash balance and is carried forward to become the opening cash balance for the next month.
- Review your estimated cash flows to actual cash flow. Once you’ve done your cash flow forecast, be sure you go back and check your forecast against the actual cash flows for the period.
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