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Improve Your Cash flow: Cash flow forecast

by Robert McCallion and Allen Warner

A cash flow forecast is a cash flow statement that is planned ahead. It is most likely to be accurate if it is prepared in conjunction with an annual business plan and the other two financial statements – Profit & Loss Account (P&L) and Balance Sheet.
A cash flow forecast should follow from the planned P&L and the following additional questions should be asked:
What will be the changes in credit taken by customers and our ability to collect the cash?
What will happen to our stock levels as a result of our plans?
What changes will we be able to make in the way we pay our suppliers?
What major capital expenditure will we be investing in during the period?
The answers to these questions should enable a good financial analyst to produce a cash flow forecast for the year ahead but this will not be enough. Cash flow tends to be volatile and seasonal so the second stage will be to split the total figures for each heading month by month, what is often called phasing.
One point to remember about a cash flow forecast – both in total and phased – is that you will never get it exactly right because cash flow is so unpredictable: for instance will that big customer pay us on the last day of one month or the first day of the next? You can only make the best possible assumptions and, if in doubt, you should veer on the side of prudence. However difficult it may be, cash flow forecasting is a vital process if you are to present a credible proposition to your bank when asking for the finance required.


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Improve Your Cash Flow: Teach Yourself

Improve Your Cash Flow: Teach Yourself
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