How To Do A Cash Flow Forecast
A Cash Flow Forecast minimises potential risks & helps you see if your company is in good shape for the future.
Good cash flow management is important but monitoring the money coming in & going out often doesn’t provide all the information needed to make accurate predictions.
Our tips & areas of focus should help you to a better strategy for your forecasting.
1. Estimate Future Sales
Accurate cash flow forecasting relies on many variables, the important one is the sales forecast, your estimate should focus on;
Market share
Resources
Competition
Pricing
2. Estimate Profit and Loss
Then factor in the projected costs to look at your profitability. You need to know your sales & cost of sales to estimate projected gross & net profits.
3. Perform Monthly Forecasts
Most business should stick to monthly estimates for simplicity, making weekly or daily projections is complex, and reports comparing them to actuals are too busy for most people to see the full picture.
4. Include Payments Due
Businesses often pay for costs & expenses on credit, which are often 30 days or more, so money coming in and going out, could do so a month or two later; it is wise to include projected payments in the cash flow forecast to improve accuracy.
5. Compare with Current Cash Flow
One of the causes of inaccurate forecasting is unrealistic expectations. It’s always important to check the forecast against the actual cash flow. Large discrepancies that no one can back up with facts point to inaccuracies missing variables in the equation.
6. Make Consistent Predictions
The first time you do a cash flow forecast may not give you the degree of accuracy that you hoped to achieve.
The best way to improve the accuracy of cash flow forecasts is to make it a habit. Updating your forecast as often as possible with new information will improve your accuracy & understanding, will make them very useful.
You will find forecasting over long periods of time helps uncover trends, and that data helps improve future predictions.
7. Account for Unexpected Costs
Fixed costs like rent, salaries, depreciation & interest are unlikely to change from month to month. But other costs may change depending on factors like weather, seasonal, and other exterior factors.
So, when calculating costs, allow some wiggle room for unexpected variations, for example, motor expenses, phone bills, light and heat
Accuracy Comes from Good Data
To create a realistic forecast, you need good bookkeeping to provide good information, to know your sales price, costs of sales, overheads, trends, and the resources. required to achieve the target.
Knowing your data, trends & doing this regularly will make forecasts, more accurate. Many things can happen in the future that will be out of your control, so control what you can.
