How to Prepare an Effective Cash Flow Forecast
Cash flow forecasting is an important management tool for every business. From small, medium and large-scale companies, having accurate cash flow forecast helps the business in projecting income and expenses. Effective cash flow management keeps your financial health stable and monitored in a timely manner.
A cash flow forecast is defined as the amount of money estimated to flow in and out of the business’ as a result of its financial activities. It is used to generate reports on expenses and income projection for the whole year. The forecast can cover annual to short-term projections on a weekly basis. A reliable cash flow forecast benefits the company in making financial and operational decisions. It can help in preparing your tax report, purchasing new business equipment and applying for finance for the company. Cash flow forecast helps you see how the business will perform during the good and bad times. This makes you ready for any challenges that can be faced by your business.
Useful Ideas for an Accurate Cash Flow Forecast
- List down all assumptions. To have an accurate cash flow forecast, the first thing you should do is list down all valid assumptions. Forecasts are effective when it is driven by assumptions relevant to the business. Make sure to choose all valid assumptions based on previous year’s performance, customer and supplier’s survey or publications. It can include sales growth estimate, general cost increases, seasonal changes and other credible data.
- Identify anticipated income from sales. It may be difficult to predict and make an estimate of future business sales but it is possible using reliable data. You can use previous financial reports from the past year to estimate your anticipated income sales. Identify trends and make adjustments based on external and internal factors affecting the business. This can include economic growth or price increases.
- Have a list of other possible estimated cash inflows and expenses. Before creating your cash flow forecast, list down all estimated cash inflows and expenses. It helps in making your forecast accurate when you have complete details of things that are variable to your finances. Anticipated cash inflows can include insurance proceeds, government grant receipts, GST rebates, tax refunds/payments and license fees. For business expenses, you can list down wages and salaries for employees, payments to suppliers, loan payments and new asset costs.
- Know how to use data for computing cash flow forecast. Using your cash flow forecast data, you can monitor it effectively using a template. Start with your current cash positions, add cash inflows and deduct cash outflows.
If you need assistance in preparing your cash flow forecast, our qualified accountants here at The Money Edge can help you. We can guide you through creating an optimized cash flow forecast. Feel free to contact us at (07) 4151 8898 for more details.