CASH FLOW FORECASTS An accurate cash flow forecast is an asset as essential as an online presence or a key staff member. In fact, it’s a vital cog in the financial machine which can quite literally inspire confidence in you and your business. At its core a cash flow forecast simply predicts for a given period: • The amount of cash going into your business • The amount going out • And the amount you have left It sounds quite underwhelming, but cash budgeting is a powerful tool. It allows you to prepare for any shortfalls in the future and it shows investors you know what you’re talking about – inspiring confidence all round. Cash flow records are usually provided as spreadsheet documents which accompany the Final Accounts (containing a Trading, Profit and Loss Account, and a Balance Sheet). Together, they form the core financial documents for a company. A cash flow forecast takes exactly the same structure as a cash flow record. BENEFITS OF CASH BUDGETING • Forces small business owners to think ahead • Helps them see when commitments are due and whether money is available to meet them • Reveals weaknesses in debt collection policy • Shows periods where shortages of cash may occur and when their might be excess cash • Gives them the ability to undertake a comparison with actual results FORECASTING STEPS 1. Identify cash in It is essential when building a forecast to make sure the data you enter is as accurate as possible, so try to make sure you cover all the bases of possible cash-in and cash-out sources. Cash sales, cash deposits in advance, debtors paying back credit, interest received on savings, commissions, sales of assets and injections of capital (from a loan, for example) should all be recorded as ‘cash in’. 2. Identify cash out Cash and credit purchases (the latter figuring in the month of payment), other cash expenses (such as wages or power), on-going regular payments (like rent), and infrequent costs (like annual insurance payments or provisional income tax payments) should all be recorded as ‘cash out’. Depreciation, however, is not a cash expense and is ignored. 3. Calculate net cash flow Cash inflow – cash outflow = net cash flow 4. Adjust the bank balance each month Add net cash flow to the month’s opening bank balance to estimate the bank balance at the end of the month. Compare cash flow projections against actual cash flows each month and adjust the closing bank figure – if you don’t all subsequent months will start with an inaccurate cash balance. Resources: - www.business.govt.nz/starting-up/cash-flow-forecasting - www.business.govt.nz/managing/managing-finance/managing-cash-flow - www.business.govt.nz/tools-and-templates/educational-resources/cash-flow-forecasts/Cash%20flow%20forecasts%20Student%20Handout.doc - www.business.govt.nz/tools-and-templates/educational-resources/cash-flow-forecasts

1. Cash Flow Forecasts

2. Cash flow forecasts predict…
- Cash flow in
- Cash flow out
- Cash left
…for a given period
(usually a year)
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3. Benefits of cash flow forecasting:
• Forewarns any cash flow
shortfalls or peaks
• Helps business owners
prepare for them
• Exposes debt collection
issues
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4. Cash is…
... any liquid asset…
…that can be turned into
cash to pay an urgent debt
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5. Cash flow forecasting in 4 steps:
1. Identify cash in
2. Identify cash out
3. Calculate net cash
flow
4. Adjust bank balances
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6. Step 1: Identify cash in
Cash in can be…
-Cash sales
-Interest on savings
-Debts repaid
-Cash from a loan
… plus other types of
easily accessible income
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7. Step 2: Identify cash out
Cash out can be…
-Purchases
-Utility bills
-Wages
… however, depreciation does
not count even though interest
counts as a “cash in” source
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8. Step 3: Calculate net cash flow
Subtract “cash out”
from “cash in” to find
net cash flow
The equation is simple -
the hard part is
accurately identifying
the sources defining
the flow of cash
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9. Step 4: Adjust bank balances
Add net cash flow to
bank balance for the
beginning of the month
to predict what’s going
to happen by the end of
the month
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10. Just be careful…
At the end of every month
you can compare forecast
to reality
Just make sure you leave
the correct closing bank
figure in your records…
If you don’t future
forecasts will be inaccurate
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11. Find Out More
Facebook.com/business.govt.nz
Twitter.com/business_govtNZ
Linkedin.com/company/business-govt-nz
Slideshare.net/MED-Business
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