Last edited 24 Sep 2020

Cash flow forecast


[edit] Introduction

A cash flow forecast is an important business tool that establishes whether there is enough cash to run a business or to expand it. It will also reveal when more cash is going out of the business, than in.

A cash flow forecast (also called a 'cash flow budget' or 'cash flow projection') helps identify whether a firm needs to borrow, how much, when, and how it will repay the loan.

Building a cash flow forecast allows an evaluation of cash resources that are required and when they are required. Business owners can identify likely future gaps in funding and plan for those gaps accordingly. It is an important tool for predicting the continuing financial health of the business.

Additionally, cash flow models enable business owners to assess 'what if' scenarios by changing key variables to see how vulnerable the business is to price changes, staffing levels, exchange or interest rate movements, and other key drivers.

In larger organisations the cash flow projection can be integrated with day-to-day operations. This can help identify what production is necessary, what resourcing is required and can provide an assessment of the capacity within a business.

[edit] What should be included in a cash flow forecast?

There are three key elements in a cash flow forecast: likely sales, projected payment timings, and projected costs.

[edit] Likely sales

To start, estimate likely sales for the weeks or months covered by the cash flow forecast. The easiest way to do this is to look at sales history from the last few years. Take note of any seasonal patterns, or the impact of promotions in those months.

If it is a new business, then use data from suppliers, industry experts and even competitors to make predictions.

When estimating these sales, it’s important to take any future plans into consideration. Take a look at the current state of the market and any emerging trends, as these may have an impact on the business. Things to consider include any promotional activity or product launches, and the activity of competitors too.

[edit] Projected payment timings

Once the estimated sales are in place, add in when payments are expected to be received. Factor in a delay for most payments.

[edit] Projected costs

Next estimate outgoings. The business will likely have fixed and variable costs, and both will need including.

Fixed costs include things such as rent and salaries. Add these dates and projected amounts, including bills, fees, memberships and tax payments.

Variable costs are the opposite – they’re usually dependent on the sales made. For example, stock or raw materials. In this instance, use likely sales to predict how much these costs will be.

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