5 Steps to Cash Forecast Heaven!

A recent report by Menzies the Accountants suggested that a third of SME’s are concerned about future cash forecasting, especially with economic and Brexit uncertainties. As running out of cash is one of the main reasons for business failure, now is a good time to ask, “is my cash forecasting as good as it could be?”

Producing an accurate cash forecast is challenging, but it is vital to ensure you have enough cash to conduct business and predict when additional funds are required. It can also indicate the type of financing required whether this be for the short or long term.

This is my guide for pulling together a month by month cashflow forecast:

Inflow profile
The starting point is to estimate when sales will be made and apply the payment terms to establish when the cash inflow will be received. Remember to include VAT as appropriate and factor in any predicted price changes or contract wins. Plan in the timing of any irregular income such as grants, R&D tax credits, rent received, VAT refunds etc

Outflow profile
Based on the demand for sales, estimate when products and staff will be required and cost appropriately including VAT if applicable. Use the profit and loss as a guide to forecast associated costs and apply the payment terms to deduce when the outflows will be incurred. The timing of irregular payments such as rent, rates, tax, capex and dividends need to be given special attention and ignore any non-cash costs such as depreciation or goodwill write-offs.

Integrated model
For the most reliable results combine these elements into an integrated model with a profit and loss and balance sheet. Excel is perfect for this task and will ensure that the cash forecast is aligned with the financial statements and all checks and balances are in place. This will also give credibility to the figures and comfort to lenders that all three statements are accurate.

Prepare alternative scenarios
It is notoriously difficult to produce an accurate cash forecast due not only to the difficulty in predicting the timing of future cash flows, but the inherent uncertainty of predicting the future! A possible way around this latter problem is to build different models for different outcomes eg one model assuming a contract is won and another assuming it isn’t! Excel can really help simplify this process as it can help crunch the numbers.

Monitor and update
A cash forecast is a dynamic document and regular updates will ensure it gives the most up-to-date position. Gradually you will gain an ability to predict future requirements with increasing accuracy and thus give the business the best opportunity to weather uncertainties and support growth.

A Finance Interim can help you develop your cash flow forecast to ensure you have enough cash to grow and manage peaks and troughs in cash. Why not get in touch if you need help pulling a model together, preparing a forecast for a lender or just to discuss cashflow?



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