A cash flow forecast is such a vital tool for business owners. It help drive the success of your business – you know when you can invest, take profits, expand – or if you have to take action.
It is particularly important for businesses that are rapidly growing, and making great margin – these businesses can run out of cash.
To meet your fiduciary duties as a director owner, you must know that you are solvent and can meet your debts as and when they fall due.
This video explains why you need a cash flow forecast, sometimes described as a cash flow statement and how to put it together. It is quite easy – and can be completed in 30 to 60 minutes.
There is a cash flow template for you to use to develop a cash flow forecast for your business.
Why Cash Flow is King
Even businesses that make great margins can run out of cash if the pace of cash going out to suppliers is faster than the cash coming in from sales. Or if your customers pay slowly.
A cash flow statement allows you to:
- Reduce worry by knowing where you stand
- Identify the triggers to take action when you have a clear head
- To be able to undertake a sensitivity analysis when making key decisions
Many owners rely on their accounting software to provide their cashflow forecast. That is better than nothing. However I find owners don’t interrogate the data, yet rely on the results. The big advantage of having a cashflow forecast is that you can more accurately predict when it is sensible to invest in assets that will help you grow the business, take drawings from the business, or take action early if a shortfall looks likely.
Step 1: Click here to download the Cashflow template (no registration required)
Step 2: Review the example data so that you can see the way data is entered
Step 3: Download your data from Xero or your accounting system
Step 4: Populate the spreadsheet using your data. Make sure you replace the data in the Cashflow template, however, do not delete the formulas (shaded with green).
Step 5: Adjust your data to allow for the likely timing of receipts and payments
Step 6: Note that for loans you will need to use a “-” prior to the number (per the example) eg -10000 to ensure the numbers add up correctly
Tips:
- Don’t try to be too exact: this is not a set of accounts that have to balance exactly. It needs to provide an approximate guide
- Keep your forecast updated and to hand so that you can ensure it is current
- Your receipts and payments for products may not line up in the same month depending upon your payment arrangements with your supplier and how quickly your customers pay you
- Note that gross cash profit is an approximation
If you would like developing a cash flow statement (I am completing these with most of my clients), help with your business, including ways you can improve your cash flow and profit, please contact us.
